South Africa: Domestic demand hard hit as recession looms
September 4, 2018
South Africa’s economy entered recession in the second quarter, contracting in seasonally-adjusted annualized (SAAR) terms for a second consecutive quarter. According to Statistics South Africa, on a quarter-on-quarter basis, the economy shrank 0.7% SAAR, improving on the first quarter’s revised 2.6% SAAR nosedive (previously reported: -2.2% SAAR) but still signaling a worrying economic slump. The second-quarter reading came in below expectations; market analysts had predicted the economy would narrowly escape a technical recession. On an unadjusted annual basis, growth was halved from the first quarter and landed at 0.4% (Q1: +0.8% year-on-year). Driving the broad-based slowdown was a sharp fall in agricultural yields, as well as anemic industrial output.
A breakdown by expenditure showed that domestic demand plummeted. Household spending contracted 1.3% SAAR (Q1: +1.0% SAAR) as purchases of all-category goods fell, in line with stagnant employment gains and higher inflation. Growth in government spending, likewise, slowed to 0.7% SAAR (Q1: +1.4% SAAR). Fixed investment contracted 0.5% SAAR in the quarter (Q1: -3.4% SAAR) on declining machinery and equipment, and residential outlays. Non-residential investment, on the other hand, again recorded gains. Significant drawdowns of inventories, especially in the mining and manufacturing industries, subtracted 2.9 percentage points from the headline reading.
More import-intensive categories took a bruising in the quarter, leaving imports of goods and services to grow only 3.1% SAAR (Q1: -6.9% SAAR) in the quarter. On the other hand, exports of goods and services rebounded considerably on trade in extractives, jumping 13.7% SAAR (Q1: -17.4% SAAR). Taken together, the external sector contributed 3.3 percentage points to the headline reading—a huge improvement from the 3.2 percentage points subtracted in the first quarter.