As if a recession is not bad enough, low growth lies ahead

Arthur Kamp, economist at Sanlam Investments

Not only has South Africa entered a technical recession (two consecutive quarters of negative GDP), future growth expectations are now likely to be revised down.

Improved terms of trade briefly lit up the outlook six months ago

The bounce in GDP in the second half of 2017 partly reflected South Africa’s improved terms of trade, which along with lower inflation boosted consumers’ purchasing power and spending.

Then came higher oil prices and an increased tax burden

However, in the first half of 2018 a deterioration in the terms of trade (due to higher oil import cost) and an increasing tax burden, including the 1% VAT rate hike in April 2018, weakened disposable income and households’ spending. The 1.3% seasonally adjusted and annualised decrease in final household consumption expenditure in the second quarter of 2018 was the first outright decline in this expenditure category since the start of 2016.

Capital investment has fallen significantly

At the same time real private sector credit extension has remained palpably weak as the Reserve Bank has been limited to a shallow interest rate cutting cycle, partly due to tightening global financial conditions. Amidst these developments, given constrained profits growth, fixed investment spending and, hence, job creation, have disappointed. The 0.5% decrease in total gross fixed capital formation in the second quarter of 2018 follows a material fall of 3.4% in the preceding quarter.

There is the risk of higher domestic interest rates

Looking ahead to the rest of 2018 and 2019, it seems reasonable to expect growth momentum to lift a little as the impact of the drought in the Western Cape fades – assuming the nascent shift towards global trade protectionism does not derail the global economic expansion. After all, momentum in the Reserve Bank’s leading indicator continues to point to a better second half of the year. But, that said, the tightening of global financial conditions imply countries running macroeconomic imbalances will be placed under closer scrutiny by investors, especially if imbalances reflect a weak fiscal position. The Rand is a useful shock absorber in this situation, but ultimately, the risk is higher domestic interest rates should the Reserve Bank observe that currency weakness is feeding through into substantially higher inflation expectations – especially given the Bank’s view that monetary policy is still accommodative.

We are lowering our growth outlook for SA

On balance, the growth outlook into next year is modest at best. Given the outright decline in real GDP in both the first and second quarters, we lower our average expected real GDP growth rate for 2018 to 0.75%.