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PPS Investment Comment: SA GDP (Q2 2019)

03 September 2019 Reza Hendrickse, Portfolio Manager at PPS Investments

Second quarter economic growth surprised on the upside according to the latest GDP statistics released today, with a slight positive revision to the first quarter reading as well. In the second quarter, the economy grew 3.1% quarter-on-quarter, exceeding analyst expectations of around 2.5%. This is a strong outcome on the face of it, but viewed in the context of the prior quarters’ significant contraction, the rebound from a depressed base is less spectacular. Encouragingly, this positive reading means that a recession has been averted for now, though it doesn’t escape the fact that underlying growth remains weak.

The primary sector was a large contributor to this quarter’s rebound, with a jump in mining offsetting weakness in agriculture. A pick-up in service activity also made a significant contribution, driven by finance, trade and government activity. Thanks to more reliable electricity supply this quarter, the manufacturing sector and electricity production side of the economy also contributed to growth. The agriculture, construction and transport sectors on the other hand contracted this quarter.

Today’s GDP data release is a step in the right direction, but the stop-start pattern of growth that we have become accustomed to means expectations will remain tempered. Base effects and reasonable growth outside of SA have carried us for the moment, but sustained growth relies on overcoming the structural challenges that hamper productivity and economic development. Finance Minister Tito Mboweni’s recent economic reform document tries to address some of this, while at the same time engineering the economy towards a 2% to 3% growth rate and creating 1 million jobs. In principle it is ambitious, but the initial resistance to it, both within the ANC and from its alliance partners does not inspire confidence.

Looking ahead, despite the jump in second quarter growth, one should bear in mind that GDP data is inherently backward looking. In contrast, forward indications remain consistent with a subdued domestic growth outlook, with a similar message embedded in our most recent PMI data.

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