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Contraction in South Africa’s GDP ‘deeply disappointing’ – Seifsa

Seifsa chief economist Dr Michael Ade

Seifsa chief economist Dr Michael Ade

Photo by Creamer Media

3rd March 2020

By: Marleny Arnoldi

Deputy Editor Online

     

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The 1.4% contraction in South Africa’s gross domestic product (GDP) in the fourth quarter of last year was “deeply disappointing” and sent the economy into a recession, says Steel and Engineering Industries Federation of Southern Africa (Seifsa) chief economist Dr Michael Ade.

Statistics South Africa (Stats SA) on Tuesday released the data on real GDP growth, which showed that the 1.4% contraction had followed on from a seasonally-adjusted and revised 0.8% decrease in GDP in the third quarter of last year.

Ade states that the decelerated real GDP growth rate officially catapulted South Africa into a technical recession and compounded the challenges faced by local businesses in a tough operating environment.

“The dip in the GDP – and, by extension, domestic demand – is cause for concern for domestic companies and initiatives aimed at ensuring a sustainable turnaround should be expedited.

“This is especially the case because the deteriorating economic growth environment makes it difficult for domestic companies to properly plan business activity in advance since their sustainability is not guaranteed,” he said.

Real GDP increased by only 0.2% for the full 2019, compared with growth of 0.8% in 2018. Professional services firm PricewaterhouseCoopers (PwC) commented that the 0.2% number was the weakest calendar year growth rate since the global financial crisis and marginally lower than the 0.3% used by the National Treasury for its revenue forecasts in the 2020 Budget.

The firm added that the 2019 figure did not bode well for the growth prospect for 2020, especially considering that the decline in growth in the Chinese economy, owing to slowed production on the back of Coronavirus, would likely affect South Africa. Should the Chinese GDP grow by 5% and not 6% as anticipated, the International Monetary Fund suggested it could result in a 0.2 percentage point decline in South African GDP growth this year, owing to adverse trade effects.

Treasury expected GDP to grow by 0.9% this year, however, North West University Business School economist Professor Raymond Parsons said a 0.6% growth rate would be more likely.

"Downside risks to growth will now challenge some of the basic assumptions upon which the recent Budget projections have been based, including the rate at which debt ratios will rise over the next few years.

"Even on the most favourable assumptions the escalating debt trends still present policymakers with difficult choices, but choices that cannot be avoided. These trends will no doubt also be taken into account when Moody’s has to decide later this month whether or not to downgrade SA’s investment rating."

Investec forecast a GDP growth rate closed to 0.5% for the year, owing to many "structural problems" remaining unresolved.

"For the South African economy, the challenges arising from the global macroeconomic backdrop, have been compounded by multiple domestic factors. These pertain to the security of electricity supply in the country, with heightened rotational load shedding impeding the optimal functioning of the economy. Additionally, persistent policy uncertainty and the slow implementation of crucial reforms, continue to weigh on business and consumer confidence, inhibiting satisfactory growth," the asset manager stated.

CONTRIBUTING FACTORS

The transport, storage and communication industry contracted by 7.2% and contributed -0.6 of a percentage point to the fourth-quarter GDP. Decreased economic activity was reported for land and air transport, as well as transport support services.

The trade, catering and accommodation industry contracted by 3.8% and contributed -0.5 of a percentage point to GDP. Decreased economic activity was reported for wholesale and motor trade and accommodation.

The manufacturing industry contracted by 1.8% and contributed -0.2 of a percentage point to GDP growth. The divisions that made the largest contributions to the decrease were motor vehicles, parts and accessories and other transport equipment; and wood and wood products, paper, publishing and printing.

The construction industry contracted by 5.9% and contributed -0.2 of a percentage point to GDP. Decreases were reported for residential and non-residential buildings and construction works.

The agriculture, forestry and fishing industry contracted by 7.6% and contributed -0.2 of a percentage point to GDP. The decrease was mainly owing to a fall in the production of field crops and horticultural products.

On the plus side, finance, real estate and business services expanded by 2.7% and contributed 0.6 of a percentage point to GDP. PwC said the finance, real estate and business services industry has been a reliable growth driver in the South African economy for many years and has not recorded a single q-o-q decline in real activity in the past four years.

The mining and quarrying industry expanded by 1.8% and contributed 0.1 of a percentage point to GDP. Increased production was reported for platinum group metals, iron-ore and gold.

 

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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