South Africa: Country in recession as economy contracted unexpectedly in Q1
June 12, 2017
The South African economy hit a bump in the first quarter of 2017. Data released by the country’s statistical institute showed that the economy logged the second consecutive contraction and entered a technical recession in Q1. Economic activity plunged a steep 0.7% at a seasonally adjusted annualized rate, far worse than Q4’s 0.3% drop and surprising market analysts, who had expected a 1.0% expansion. In annual terms, the economy expanded 1.0% in the same time period (Q4: +0.7% year-on-year). Africa’s most-industrialized country has entered its second recession since 2009 and contracted for the fourth time in eight quarters. Q1’s print put embattled President Zuma once more in the spotlight and underscores how chronically inefficient policy-making continues to beset the economy.
The sharp downturn observed in the first quarter was driven by a fairly broad-based decline in all but two sectors of the economy. Trade, catering and accommodation and manufacturing were among the sectors that logged the sharpest contractions, dropping 5.9% and 3.7% respectively. The drop in both sectors was the largest in years. The decline in manufacturing was largely driven by lower output of petrochemical products and comes as no surprise, following poor monthly data from the first quarter and weak demand for South African goods (Q4: -3.1% quarter-on-quarter SAAR). Other sectors such as construction and electricity, gas and water lost steam and contracted after expanding in the preceding quarter. In contrast, the mining and agriculture, forestry and fishing components were the only two sectors that expanded in the January-to-March period. Both sectors expanded at double-digit rates, with the large upswing underpinned by higher prices for commodities and a recovery in agricultural output as weather conditions improved following a devastating drought last year.
On an expenditure basis, total consumption swung from a 1.7% increase in the final quarter of 2016 to a sharp 2.0% drop in the first quarter, dragged down by declines in private and public consumption, with the former constrained by high unemployment, inflation and a weak currency. Growth in gross fixed investment slowed to 1.0% (Q4: +1.7% qoq SAAR), reflecting growing apprehension regarding the economy, and is expected to decline further following the credit downgrade by all three major credit rating agencies. Lastly, the external sector also performed poorly, with exports declining 3.2% (Q4: +12.5% qoq SAAR) and imports expanding 3.2% (Q4: +6.1% qoq SAAR). As a result, the external sector deducted 1.9 percentage points from growth in the first quarter, as opposed to the 2.1 percentage points positive contribution observed in the preceding quarter.
The South African economy is expected to languish for the foreseeable future. The external sector remains constrained by still-low prices for key commodities such as cobalt and platinum, while the recent credit rating downgrade will raise borrowing costs. The downgrade is also indicative of vanishing confidence in the economy and signals tough times ahead. Without comprehensive structural reforms, the economy will continue to underperform, since the country possesses little room to reactivate economic activity through fiscal means.