SA economy falls into recession in 2017Q1

Economic activity declines q-o-q despite recovery in agriculture and mining

Statistics South Africa (StatsSA) reported on June 6th that the South African economy contracted by 0.7% q-o-q during the first quarter of 2017. Following the 0.3% q-o-q contraction in 2016Q4, this resulted in South Africa entering a technical recession, defined as two consecutive quarters of q-o-q decline. Even more worrying is the fact that 2017Q1 was the fourth instance that growth declined q-o-q over the past eight quarters. The StatsSA report can be viewed here.

While agriculture (+22.2% q-o-q) and mining (+12.8% q-o-q) responded well to summer rains and higher international commodity prices, respectively, this was not enough to drive the economy stronger. All other industries posted negative q-o-q readings. A big negative factor during the first quarter was a 5.9% q-o-q drop in activity in the trade, catering & accommodation industry.

According to earlier StatsSA reports, retail sales fell by a real (inflation adjusted) rate of 1.1% q-o-q during the January-March period, while sales at restaurants fell more than 12% q-o-q in real terms – this was larger than the normal post-holidays decline. Indeed, the latest GDP report indicated that – amidst weak consumer confidence – real household expenditure dropped by a significant 2.3% q-o-q in 2017Q1.

On a positive note, Africa’s second-largest economy was still 1% larger in 2017Q1 compared to the previous year – this was in line with economists’ expectations. While some of this is associated with the weak state of the economy a year earlier, which provided some base effects for the 1% y-o-y growth rate, it is important to note that agriculture and mining produced a strong performance during 2017Q1. It also started the year off on a better footing with the best y-o-y reading since 2015Q2.

 Considering the second quarter so far, the Standard Bank South Africa Purchasing Managers’ Index (PMI) – an indicator based on the surveyed views of purchasing executives in private sector companies – was slightly above the neutral level of 50 during April and May. This signalled only marginal growth in the local economy in Q2 so far. Data on new business inflows revealed weak underlying business conditions in the private sector economy during the two-month period.

 In a statement on May 25th, the South African Reserve Bank (SARB) forecast an overall growth rate of 1% for 2017, citing improved agricultural and mining production. However, the SARB also warned about constrained manufacturing production. The World Bank commented in a report released on June 4th that it expects only 0.6% growth this year, pointing to heightened political uncertainty and a deterioration of investor confidence amid sovereign rating downgrades.

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