Third quarter growth: 0.2% OR 2.6%

The persistent confusion about South Africa’s economic growth rate was highlighted once again on Tuesday following the release of the third quarter economic growth numbers as calculated by the South African Reserve Bank.

Prof. Chris Harmse, chief economist of Dynamic Wealth, says the economic growth rate for the third quarter (quarter on quarter growth seasonally adjusted and annualized) as presented by the Reserve Bank in its Quarterly Bulletin, had to be adjusted downward by 2.4 percentage points from 2.6% in order to match the growth rate of 0.2% calculated by Statistics South Africa (SSA).

Though up- and downward adjustments in economic growth numbers are a common practice worldwide, Harmse says the problem in this instance is because the downward adjustment of the Reserve Bank’s economic growth numbers has become the norm and is not sufficiently neutralized by upward adjustments. The table below shows that out of the last 12 quarters the Reserve Bank’s growth rate had to be adjusted downward eight times. And the gross domestic expenditure number had to be reduced eleven times (by the Residual Item).

Moreover, Harmse points out that the downward adjustments are growing larger and larger. Indeed, the adjustment (for the third quarter) of R23.67 billion as reflected by the Residual Item is the largest downward adjustment ever on record.

Though SSA is the official statistics agency of South Africa and as such the economic growth number of 0,2% must be accepted as the official economic growth rate for the third quarter, Harmse says the magnitude of the downward revision of the Reserve Bank’s number is enough cause for doubting the country’s economic growth statistics.

SSA calculates the economic growth rate from the production side of the economy whilst the Reserve Bank does it from the expenditure side. In this respect the Reserve Bank adds the spending of households, the government as well as investment to calculate gross domestic expenditure (GDE). The current account deficit is then subtracted to arrive at the gross domestic product (GDP).

However, in the case of downward adjustments, the difference between the Reserve Bank and SSA’s GDP numbers are subtracted from the spending items listed above in order to arrive at a lower GDE number. This subtraction is called the Residual Item.