Money and Markets

SA's economy may remain depressed until the elections - but at least this industry is back from the dead

Business Insider SA
(Statistics SA)
  • South Africa is now officially in recession - with the economy shrinking by 0.7% in the second quarter of 2018, after diving 2.6% in the first.
  • Agriculture has been hit hardest, and this is blamed on the drought in the Western Cape.
  • Surprisingly, the embattled construction sector has seen growth for the first time in more than a year.

South Africa’s latest GDP numbers show the economy is in serious trouble.

It shrank by 0.7% in the second quarter, after contracting by 2.6% in the first. This is our first recession (when the economy shrinks for two successive quarters) in almost a decade.

(Statistics SA)

Statistics SA’s numbers show dark clouds all around, with manufacturing declining and agriculture shrinking by a massive 29% - after it already contracted by almost 34% in the first quarter.

This data partially reflect the tail-end negative effects of the Western Cape drought, as well as the delayed harvest in the summer crop growing areas of South Africa, particularly the grain and oilseed production regions, says Wandile Sihlobo, head of research at the Agricultural Business Chamber (Agbiz) in South Africa.

Agricultural activity was also hit by farmers who reduced their planting areas because of depressed prices, says Paul Makube, senior agricultural economist at FNB Agri-Business. But the sharp slump does not mean South Africa will run out of food.

“We remain well supplied with food – for example, while South Africa will only consume 10.8 million tonnes in maize, we will produce more than 16 million.”

Makube expects the agricultural sector to grow in the third quarter, by at least double digits.

Households are not spending

Recent results from SA companies confirm the latest GDP numbers, which show consumers have been hit hard with the VAT hike and higher fuel prices, and that they are very uncertain about the future, with very little confidence, says Gustav Schulenburg, an equity analyst at  PSG Asset Management.

The data show that South Africans are spending less money on a range of goods:

(Statistics SA)

These sectors bucked the down trend

But amid the doom and gloom, two industries showed some growth: mining and, more surprisingly, construction.

(Statistics SA)

The construction industry expanded by more than 2%.

The sector has been shrinking since the first quarter of 2017, and the reported growth is a pleasant surprise, says Ntando Skosana, project manager of construction industry performance at the Construction Industry Development Board.

"We suspect that the positive growth could be due to an increase in building plans completed in private sector non-residential work, or it could be the renewables energy projects being rolled out." 

The construction industry has been ravaged by a lack of government infrastructure spending since the global financial crisis. 

The only large government entity that kept on spending was the South African National Roads Agency (Sanral), but with all the construction groups competing for the same contracts, prices and profitability took a hit. Then construction companies were fined millions for collusion with other construction groups for World Cup tenders, and Sanral in the past year has stopped spending.

This wreaked havoc on SA’s large construction companies: eight years ago, Aveng, Group 5 and Basil Read were worth R31bn. Today they are valued at around R350m and Basil Read is in business rescue. 

Things are picking up in the local construction industry, says Ian Massey of MDA Consulting, an independent consultancy in the construction sector. “But we need to see a lot more real opportunities to prevent the embattled sector going under by year end.”

A couple of large projects should be coming online in the medium term, including the planned R22 billion upgrade of the N3 between Pietermaritzburg and Durban. Massey says that the design work for that has commenced, and that construction work should start in the middle of next year.

Other projects that appear to be progressing is the upgrade of the container terminal in the Durban harbour. There are also indications that the second phase of the Lesotho Highlands project is at last getting into gear.

SA mining dependent on US, China trade talks

Mining also saw a growth bump in the second quarter, with increased production reported for the platinum group metals in particular.

This is in part due to the weaker rand, which makes South African metals – which are priced in dollar  - more attractive, and gives miners a boost, says Warwick Lucas, chief investment officer at Galileo Capital.

However, he doesn’t believe that the mining sector will really start picking up until the Chinese and US trade negotiations are resolved. Until then Chinese companies will stall investment – which has a direct impact on their demand for South African resources.

Election effect

Lucas does not expect any clear progress in this regard until November’s US mid-term elections are out of the way.

He also doesn’t expect local confidence to bolster economic growth ahead of the South African elections, which should be held next year between May and August.

“There is just too much political posturing to help confidence at this stage.”

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