Economist warns that SA’s “recession drought” is not over yet
Maarten Ackerman, chief economist and advisory partner at financial services firm, Citadel, has warned that while South Africa has moved out of a technical recession, the reality is that the country has experienced an “economic drought” for the past six years.
“Ask any Capetonian right now and they will tell you that one day’s rain is wonderful, but unfortunately it won’t fill the dams sufficiently. This is as applicable to the latest GDP data released earlier today,” Ackerman said.
Numbers out on Tuesday showed that the economy rebounded by 2.5% (quarter-on-quarter, annualised) during the second quarter of this year. Agriculture, forestry and fishing was the biggest contributor followed by finance and then mining.
This, after the country recorded two negative quarters of GDP (Q4-16 and Q1-17), leading to a technical recession at the end of March 2017.
“Encouraging was the strong recovery in household final consumption (from -2.7% Q1 to 4.7% Q2), which is an important driver for a consumer-based economy like South Africa. The synchronised global economic recovery seems to support a solid rebound in exports over the quarter as well,” Ackerman said.
“The reality is that South Africa has experienced an ‘economic drought’ since about 2011. Over the past few years our economic growth has lagged that of the global economy by more than 2%.
“Furthermore, recent population data confirmed that over the same period the population growth outstripped economic growth – this might not be the technical definition of recession but what I call an economic drought (economic growth over the past year was only 1.1% – well below the more than 1.6% population growth),” Ackerman said.
“Lower economic growth resulted in less job creation or inclusive growth for that matter, less tax revenue, lower business and consumer confidence and a stagnation in fixed investments,” the economist said.
He added that the latest numbers printed a 2.6% decline in gross fixed capital formation, “and it is worrying to see the significant decline in construction, residential and non-residential buildings – an indication that future confidence in the economy and policy remains low”.
This deteriorating economic environment resulted in the recent credit downgrade, Ackerman pointed out. “If we can’t reverse this underperforming economic trend soon, our fiscal position will become unsustainable,” he said.
“Today’s positive numbers are a start, and as a result, growth for 2017 should be closer to 1%, which is more than most people expect. However, South Africa needs a return of confidence and policy stability to ensure many more positive quarters and hopefully an end to our current economic drought,” Ackerman said.
Zaakirah Ismail and Walter de Wet of Standard Bank’s research team said in a note on Tuesday that over the past three years, South African GDP growth has lagged the rest of the world by an average of 2.2%.
Even with the recovery today for Q2:17 GDP from recessionary territory in Q1:17, any such recovery won’t push GDP much higher than 0.5% y/y in 2017.
“Disappointing SA growth won’t bode well for tax revenue, and tax buoyancies will add pressure to the fiscus, which, in our view, will be ratings- and rand-negative in 2018.
“We expect a budget deficit of around -3.8% of GDP this fiscal year, compared to the -3.1% pencilled in during the 2017 Budget in February. While plenty of negative news is already reflected in SA markets, the pressure will most likely build in 2018,” Standard Bank said.
The rand, meanwhile, remained relatively subdued following the GDP data release, with Peregrine Treasury Solutions noting that even though the figures were slightly better than expected, a positive outcome had already been priced in.
Moreover, there is massive event risk in terms of local politics with the DA looking to pass a motion for an early election, while the EFF with numerous other opposition parties brought an application to the Constitutional Court for the impeachment of president Jacob Zuma.
“The fact that South Africa is no longer in a recession, although good news, seems to be overshadowed by the local fundamentals,” Peregrine Treasury Solutions said.