OPINION

SA growth slumps

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South Africa’s newly sworn-in Cabinet, particularly the new Finance Minister Nhlanhla Nene will have plenty to think about, writes Dave Mohr, Chief Investment Strategist for Old Mutual Wealth.

Data from StatsSA showed that the economy contracted in the first quarter, with quarter-on-quarter real gross domestic product (GDP) falling 0.6% (at a seasonally adjusted and annualised rate) compared to a 3.8% increase in the fourth quarter of 2013. Compared to the first quarter of last year, the local economy grew by 1.6%

The long and ongoing strike in the platinum sector contributed to a 24.7% decline in economic activity in the mining sector. But diamond and gold output also fell. The manufacturing sector declined by 4.4%. Excluding these two sectors (about 20% of total GDP); the economy grew by less than 2% in the quarter. Finance, real estate and business services grew by 2.0%, while wholesale retail and motor trade grew by 2.1%. In other words, even if the platinum strike can be considered to be an extraordinary event, the underlying growth rate of the private sector is still weak – barely 2%. The only sector to post decent numbers was construction, whose growth lifted from 3.1% in the fourth quarter of 2013 to 4.9% in the first quarter.

The GDP report also showed that workers’ incomes (employee compensation) grew at a slower rate of 7.2% in the first quarter, dragged down by the loss of wages in the mining sector. Excluding the mining sector, as well as general government (where worker incomes grew by 11.2%) and utilities (9%), worker incomes in the private sector barely grew above the rate of inflation; in some sectors, below. In such an environment, firms will be extremely reluctant to pass on cost increases to consumers, hence the limited impact of a weak Rand on general price levels so far.

These numbers obviously reflect the past, and we are already two-thirds of the way through the second quarter. What lies ahead? Mining could rebound when the strike ends, but that will probably only reflect in the third quarter’s numbers. Manufacturing, according to the most recent purchasing managers’ index, is stabilising but not set to grow rapidly. The financial sector could benefit from trading activity on the JSE, but the property market remains sluggish and lending activity constrained. Export revenues and tourism – benefiting from a weak Rand – and construction appear to be the only bright spots of an otherwise gloomy local economy.

The SA Reserve Bank’s (SARB) latest composite leading indicator, which points to the direction of economic activity six to nine months ahead, fell by 2.3% year-on-year in March. There is thus little to get excited about. At the recent Monetary Policy Committee, the SARB downgraded its economic growth forecasts for 2014 (again) to 2.1% from 2.6%. The MPC was thus right to keep rates on hold in the absence signs that inflation is accelerating faster than expected (and with credit growth still very subdued). Unfortunately, low interest rates by themselves will not get the economy growing faster.

 

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