South Africa economic growth exceeds forecasts

Actual quarterly growth rate was 2.2% versus consensus forecast of 1.6 per cent, while annual growth was 1.1% versus consensus forecast of 0.5 per cent

The National Treasury building in Pretoria [PREUSS]

The Gross Domestic Product (GDP) data released by Statistics South Africa (Stats SA) exceeded the Reuters consensus forecast of a 1.6 per cent seasonally adjusted annualized (saa) increase in the third quarter on the second quarter by almost a half, as the actual rise was 2.2 per cent.

This brought growth in the first nine months to 0.8 per cent year-on-year (y/y), which also exceeds the full year forecast of the South African Reserve Bank (0.6 per cent) and Treasury (0.7 per cent).

In the third quarter, y/y growth was 1.1 per cent, which was more than double the consensus forecast of 0.5 per cent y/y. A y/y increase of similar magnitude or higher to the third quarter is expected in the fourth quarter.

Citadel Chief Economist Maarten Ackerman was optimistic about future growth prospects.

“With a positive growth figure of 2.2 per cent for the third quarter of 2018, the technical recession is over. We can now switch on the lights and, hopefully keep them turned on, given the issues we’re experiencing with electricity,” he wrote in his reaction piece.

Ackerman believes that if there is stronger sustained growth, it will improve South Africa’s fiscal situation.

This would be positive for the local bond market and implies that interest rate hikes will be moderate.

“On a more positive note, it was encouraging to see that household expenditure had risen by 1.6 per cent quarter-on-quarter. This points to the fact that South African consumers are not yet down and out, despite the financial challenges of higher fuel costs, increased VAT and a high unemployment rate,” he added.

He also said that business and consumer confidence is expected to rise as we approach the holiday season especially on the back of a 1.84 rand decrease in petrol prices in December.

“This … in turn should further boost the final quarter’s GDP figures. The strong growth seen in the third quarter is a step in the right direction, and with a continued focus on policy reform and implementation, we should hopefully see government’s labours slowly start to bear fruit in the near future,” he concluded.

Market matters

What matters for the bond market is nominal growth and that accelerated to 7.8 per cent y/y in the third quarter from 7.0 per cent y/y in the second quarter and 6.2 per cent y/y in the first quarter.

As tax collections are a function of nominal GDP, the higher growth means that the bond market should take comfort that tax revenue will exceed the Treasury forecast.

The Treasury growth projection for the calendar year 2018 is only 6.4 per cent, which is 0.5 percentage points below the 6.9 per cent y/y growth actually achieved in the first half of the year.

The economic stimulus plan announced in September and the above-inflation wage awards to civil servants should ensure that nominal GDP growth in the second half of 2018 is higher than the first half and the third quarter GDP data seems to give credence to this view.

In the first six months of the current fiscal year, revenue has increased by 10.7 per cent y/y, while expenditure has only grown by 6.0 per cent reducing the fiscal deficit by 11.7%. For the full fiscal year, Treasury forecast that revenue growth would only be 8.5 per cent, while the expenditure increase would be 7.7 per cent.

Hang on …

Professor Raymond Parsons from the North West University Business School warned that Eskom’s woes could undermine the positive growth momentum.

“Extended disruption of electricity supply will exact its cost in terms of production losses during this quarter and even beyond,” Parsons says.

And this is all happening at a time when South Africa is committed to boosting investor confidence. As a result a lack of security in power supply could negatively impact the positive investor sentiment and capital formation needed to support a higher growth trajectory.

“The previous ‘war room’ created a few years ago between government, Eskom and business to deal with load-shedding then may need to be reactivated to deal with the present power emergency,” he said.

Sanlam Investment Management economist Arthur Kamp noted the pressure that the household sector had been under, but expected the recent drop in the oil price to boost consumption in the fourth quarter.

He makes particular note of the slowdown in worker compensation, from 8.1 per cent y/y in the fourth quarter to only 5.4 per cent y/y in the third quarter.

In contrast, total gross operating surplus, which is a proxy for business profits, increased by 7.9 per cent y/y in the third quarter, significantly up from the recent 4.7 per cent y/y trough recorded in the first quarter.

“Given the marked slowdown in compensation growth, the soft jobs market and an increased tax burden, it is no surprise that household spending growth is modest only. At the same time, an inadequate return on investment, in a weak productivity environment, has constrained business expenditure on fixed investment,” Kamp says.

Looking ahead, the recent sharp fall in oil prices, which should support our terms of trade and purchasing power, amidst increased agricultural production and continued global growth (although perhaps moderating) is expected to help domestic real GDP growth register some improvement into 2019,” he concluded.

Helmo Preuss in Pretoria, South Africa

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