SA’s economy is shrinking at an alarming rate – and only oranges and interest rates are offering hope
- SA's economy shrank by more than 3% in the first quarter of 2019 - as loadshedding, a strike at gold mines, and a dire lack of investment hit growth.
- We could already be in a recession, with little evidence that the economy caught fire in the second quarter.
- An interest rate cut on 18 July now seems inevitable.
- For more stories, go to Business Insider SA.
SA’s economy shrank by an appalling 3.2% in the first quarter of this year compared to the last quarter – the worst performance in a decade.
Weak levels of investment and more than 270 hours of loadshedding wreaked havoc across the economy, while a gold mining strike and a weak grape harvest added to the pain.
The latest numbers from the Statistics SA show that the economy was exactly the same size in the first quarter of 2019 than it had been in the same quarter of 2018.
"The economy (is) no larger in 2019Q1 than it was a year earlier. This data release reflects poorly on President Cyril Ramaphosa’s ‘economic stimulus and recovery plan’, launched in September 2018," PricewaterhouseCoopers said in a report.
The rand took a painful hit following the GDP release, falling almost 2% to R14.76/$.
Here’s what we now know:
Manufacturing, mining, and agriculture took the worst hits
The mining industry decreased by 10.8%, with sharp falls in coal and iron ore, while a protracted strike at Sibanye hurt gold output.
The manufacturing industry shrank 8.8%, with vehicle manufacturing one of the worst performers. The agriculture, forestry and fishing sectors saw a 13.2% fall.
This was due in part to a smaller first-quarter harvest of wine grapes; that harvest is currently 14% lower than the long-term average harvest, says Wandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa (Agbiz).
Government was one of the only sectors that saw growth (+1.2%) mainly due to an increase in employment, according to Statistics SA.
Given the bloated state of the civil service, this will be cold comfort.
Exports of goods and services fell more than 26% in the first quarter - due in part to the smaller manufacturing and mining output.
“Growth in net exports was also under pressure in 2019Q1 from a weaker external environment: the International Monetary Fund (IMF) indicated in April it expects global economic growth to slow from 3.6% in 2018 to just 3.3% this year,” PwC said.
A global trade fight between the US and China is dragging on global growth.
Households spent less – especially on clothing
Household consumption decreased by 0.8% in the first quarter, with spending on clothing and footware falling a massive 12.7%.
There was almost no investment in the economy
GDP Q1 2019: Gross Fixed Capital Formation (GFCF) falls for the fifth quarter in a row. Driven by declining investment in transport infrastructure, construction works and non-residential buildings. Without investment in infrastructure there can be no longer term growth. pic.twitter.com/Yk5e3jrPlF— Karin Richards (@Richards_Karin) June 4, 2019
Gross fixed capital formation fell by 4.4%, its fifth consecutive decline.
Citrus could give the economy a boost in the second quarter
The second quarter should see a strong boost from agriculture, with the citrus industry on track to reach record exports of 137 million boxes this year due to large output, says Sihlobo.
“Citrus farmers only started with their harvest activities in the second quarter, and we expect its fortunes to be reflected when the data become available.”
However, Sihlobo thinks SA’s agricultural industry will still shrink over the whole year. This is due to dry weather in the central and western parts of the country which will hurt major summer crops such as maize, soybeans, and sunflower seeds. He expects large declines in production for each of these crops.
But we are probably already in a recession
Two successive quarters of negative growth will mean the country is in recession, and there is little evidence that the South African economy was on full blast in the second quarter. In fact, the Absa Purchasing Managers’ Index, which reflects activity in manufacturing and services, showed a sharp drop in May.
Trade data also showed that South African exports declined by more than a percent in April – which contributed to a surprise trade deficit of R3.43 billion in that month.
Interest rates will almost certainly be cut in July
At its meeting last month, three members of the Reserve Bank’s Monetary Policy Committee voted to keep interest rates unchanged, while two voted for a 25-basis point cut. Following the disastrous GDP data, the majority of members are now expected to vote for a cut at their next meeting on 18 July.
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