With GDP up 3.1% in the second quarter of 2019 (seasonally adjusted, annualised) and 0.9% for the year to June 2019, the markets have responded positively. The rand appreciated by some 10 cents on publication of the data and bonds yields declined by about 10 basis points.
It is comforting to see that we have avoided a technical recession, but most interesting is to note the severe impact that load shedding can have on the country. We had significant load shedding in the first quarter of this year and almost nothing in the second quarter, and the impact is clearly visible.
At the same time, the global environment stabilised somewhat in the second quarter of this year, resulting in better performance from exports, as well as mining and manufacturing, with less disruptive strikes from especially the mining sector as seen in the previous quarter.
What we can also see is that, in an economy where there are many structural issues, if we can sort them out and everything falls into place – if we can get Eskom to a much more sustainable place – then a 3.1% growth number is still achievable in this economy.
If we can replicate this performance and roll it out over a year, then we have the potential to reach 3% annual growth. Unfortunately, at only 0.9%, the year-on-year growth remains below population growth of 1.3%, so we can expect unemployment to continue increasing.
It is essential to lift annual GDP growth to be in line with or above population growth in order to address unemployment. Then we need to advance to the stage where we can start to create jobs. If we continue down this track, it will certainly be possible in the next three to five years.
Mining and manufacturing up, while exports remain flat
Looking a little closer at some of the sectors which contributed to growth, the mining industry particularly demonstrated a return of strength with growth of 14.4% in the second quarter, which is extremely positive given the importance of the sector in terms of job creation.
This figure reflects the fact that the global economy stabilised after a difficult first quarter, as well as the fact that South Africa was able to avoid load shedding, and fewer strikes in the sector.
Manufacturing also really surprised to the upside, printing growth of 2.1% for the quarter. Overall, however, the manufacturing sector unfortunately remains under some pressure – the latest ABSA Purchasing Manager’s Index (PMI) data released just yesterday showed that the sector had experienced a contraction, declining from 52.1 in July to 45.7 in August.
Additionally, the manufacturing industry has shed a significant number of jobs over the last year, and is an area where South Africa particularly needs to see stabilisation and growth.
By contrast, the agricultural sector posted a decline of 4.2% over the quarter, which is unfortunate given that it also declined by 13% in first quarter. Although the sector is very small, accounting for just 2% of South Africa’s economy, agriculture acts as a key driver of employment, and has been weighed down by factors including drought and land uncertainty, which have both impacted planting.
With only a slight contraction of 0.7% quarter-on-quarter, exports remained fairly flat over the second quarter, which in fact is somewhat encouraging for South Africa and demonstrates again that the global economy has started to mend after a very soft environment in the first quarter.
Strong capex growth hints at a better future
Another reason to be upbeat is the 6.1% growth in gross fixed capital formation (GFCF) seen over the quarter – the first time in the past five quarters that South Africa has seen posted a positive GFCF figure.
Regarded as a leading indicator, GFCF reflects willingness to invest back into the economy by buying capital items such as transport equipment, machinery, building and the like. This is a clear indication of positive sentiment and activity that is taking place on the ground. It also dovetails with the uptick we have witnessed in foreign direct investment flowing into the country.