Strong rebound in second quarter GDP – but “recession drought” not over yet

Maarten Ackerman, Chief Economist and Advisory Partner at Citadel.

Ask any Capetonian right now and they will tell you that one day’s rain is wonderful, but unfortunately it won’t fill the dams sufficiently. This is as applicable to the latest GDP data released earlier today.

After recording two negative quarters of GDP (Q4-16 and Q1-17), South Africa entered a technical recession at the end of March 2017. Numbers out this morning showed that the economy rebounded by 2.5% (quarter-on-quarter, annualised) during the second quarter of this year. Agriculture, forestry and fishing was the biggest contributor followed by finance and then mining.

Encouraging was the strong recovery in household final consumption (from -2.7% Q1 to 4.7% Q2), which is an important driver for a consumer-based economy like South Africa. The synchronised global economic recovery seems to support a solid rebound in exports over the quarter as well.

The recession is over – but only “technically”

So, given today’s numbers it’s official: the recession is over. But that’s the technical definition. The reality is that South Africa has experienced an “economic drought” since about 2011. Over the past few years our economic growth has lagged that of the global economy by more than 2%. Furthermore, recent population data confirmed that over the same period the population growth outstripped economic growth – this might not be the technical definition of recession but what I call an economic drought (economic growth over the past year was only 1.1% - well below the more than 1.6% population growth).

Our economic “dams” have been running empty

As a result over the past 5 years our economic “dams” have been running empty. Lower economic growth resulted in less job creation or inclusive growth for that matter, less tax revenue, lower business and consumer confidence and a stagnation in fixed investments. Today’s numbers printed a 2.6% decline in gross fixed capital formation and it is worrying to see the significant decline in construction, residential and non-residential buildings – an indication that future confidence in the economy and policy remains low.

SA’s fiscal position at risk of becoming unsustainable: confidence and political stability required

This deteriorating economic environment resulted in the recent credit downgrade. If we can’t reverse this underperforming economic trend soon, our fiscal position will become unsustainable (as is already evident from last week’s government finance statistics). Today’s positive numbers are a start and as a result growth for 2017 should be closer to 1%, which is more than most people expect. However, South Africa needs a return of confidence and policy stability to ensure many more positive quarters and hopefully an end to our current economic drought.