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Economy contracts 3.2% q-o-q in 2019Q1

04 June 2019 Article by Lullu Krugel, PwC Strategy& Chief Economist for Africa, and Christie Viljoen, PwC Strategy& Economist

Structural reforms urgently needed as annual growth drops to 0% y-o-y

Statistics South Africa (StatsSA) reported on June 4 that the South African economy contracted by 3.2% quarter-on-quarter (q-o-q) during the first quarter of 2019 – the biggest decline in 10 years. This resulted in the economy being no larger in 2019Q1 than it was a year earlier. This data release reflects poorly on President Cyril Ramaphosa’s ‘economic stimulus and recovery plan’, launched in September 2018. Information collected by Fin24 indicates that, out of 14 plans set out by the present last year, only two (expanding the VAT-exempt basket and finalising the national minimum wage) had been fully achieved by May this year.

Graph: Annual GDP growth flatlines due to q-o-q contraction in 2019Q1

Source: StatsSA

Positive growth was limited to three tertiary sectors – 1) finance, real estate and business services, 2) general government services, and 3) personal services – with the other 7 sectors all recording a q-o-q decline in seasonally adjusted activity during January-March 2019. Mining activity dropped by 10.8% q-o-q – the worst decline in three years - as the industry suffered a strike in the gold division, amidst other challenges. Manufacturing activity fell 8.8% q-o-q due to low domestic demand (in part tied to mine output) as well as a deteriorated export performance. The beleaguered construction sector contracted q-o-q for a third consecutive quarter, while loadshedding snapped at five-quarter growth sprint in utilities.

Due to the 3.2% q-o-q contraction in 2019Q1, the South African economy was no larger during the period than it was a year earlier: annual growth dropped from 1.1% y-o-y in 2018Q4 to 0.0% y-o-y in 2019Q1. Gross fixed capital formation – investment in and spending on physical infrastructure – has declined y-o-y for four straight quarters due to weak business confidence and pressure on state finances. Growth in net exports was also under pressure in 2019Q1 from a weaker external environment: the International Monetary Fund (IMF) indicated in April it expects global economic growth to slow from 3.6% in 2018 to just 3.3% this year.

After warning on May 23rd that the first quarter would see a q-o-q contraction in GDP, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) forecast average economic growth of 1.0% for 2019, down from a previous estimate of 1.3%. This will again be lower than population growth; in other words, GDP per capita will decline for the fourth year out of five. The central bank indicated that its downbeat outlook for growth this year is premised on weak business and consumer confidence, growing pressure on household disposable income, and real fixed investment forecast to contract by 0.3% this year.

In a statement released on June 3rd, the International Monetary Fund (IMF) reiterated that South Africa’s economic growth outlook “will depend critically on the pace of implementation of reforms that address long-standing structural constraints.” The multilateral organisation warned that if reform implementation “accelerates sufficiently to lift business confidence and jump-start private investment, growth would be reignited. However, if reforms are delayed, investment would fail to pick up, economic growth would remain weak in the medium term, and per-capita income would continue to decline”.

The IMF’s current list of desired reforms largely reflects what many economists would suggest as a checklist for boosting economic growth. These include strengthening governance, encouraging greater competition in goods and services markets, increasing labour market flexibility, reducing the cost of doing business, improving public enterprise efficiency. The SARB has also warned numerous times that monetary policy cannot fix South Africa’s growth rate: in May, it again said that “current challenges facing the economy are primarily structural in nature”, and will require “a combination of prudent macroeconomic policies and structural reforms that raise potential growth and lower the cost structure of the economy”.

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