Impressions of the South African economy by Dr Adrian Saville, CE, Cannon Asset Managers
Looking at GDP from the production side of the economy:
At the headline level, the number make for worrying reading with the SA economy contracting by 2.2% over the first quarter on an annualised, seasonally adjusted basis, and rising by a modest 0.8% for the year to end March 2018.
We always put more weight on longer-term results, consequently the year-on-year figure of 0.8% growth should be viewed as the “heavier” of the two numbers. However, on that basis, GDP growth of only 0.8% is particularly modest and puts South Africa at the bottom end of most economic growth tables for the period.
Of far greater concern, though, is the fact that SA’s population growth rate, at 1.5%, comfortably exceeds our economic growth.
Thus, on a per capita basis, South Africa is heading backwards. In fact, if we look at the past decade, we see that income per capita has run flat from 2008 to date.
For all intents and purpose, South African households have endured a lost decade. South Africa is in a very low growth setting, and seems trapped here.
Drilling into the quarter-on-quarter figures, the trend is notably worrying. With the usual caveat of looking at some short-term movements, we see that the production factors in the economy are where the declines have taken place: Mining and quarrying, Manufacturing, and Agriculture, forestry and fishing. Worse, these are the labour-absorbing sectors of the economy. (It should be noted, though, that the agricultural industry is highly volatile and comes off a high base, so we should not read too much into the -24.2% from this sector).
It is sobering to note that these declines were offset by 1.8% growth in general government services.
Modest redemption of the poor primary and secondary sector performance came from a positive contribution from the services sector in general.
Turning to the expenditure side of the economy, the GDP picture looks equally worrying:
There are four expenditure components of GDP: private sector consumption, government spending, investment expenditure and net exports (the foreign sector).
When looking at successful, competitive countries, we see that the sustainable economic growth is investment fed and export led.
In South Africa, in Q1 2018, investment spend (Gross Fixed Capital Formation) slipped 3.2%. In fact, this sector has contracted in eight of the past 16 quarters, pointing to an anaemic economy that is investment starved.
The export sector – an obvious display of competitiveness in international markets – saw exports down by 16.5% and imports falling by 6.5%. Of great concern, the slippage in imports was largely of machinery and equipment – the very elements which feed future economic growth.
On the expenditure side, growth came from consumption spending and the government sector, which is simply unsustainable by virtue of the fact that it represents activity but doesn’t build productive sectors. Capacity for future economic growth, in the form of investment spending and importing of capital goods, is not being developed and the levers to drive the economy are being neglected.