South Africa: Economy slips into technical recession in Q4 2019
The economy sunk into a technical recession for the second time in two years in the fourth quarter of last year, as had been expected by market analysts. GDP fell 1.4% in Q4 over the previous quarter at a seasonally-adjusted annualized rate (SAAR), after contracting a revised 0.8% SAAR in Q3 (previously reported: -0.6% quarter-on-quarter SAAR). In addition, in year-on-year unadjusted terms, GDP fell 0.5% (Q3: +0.1% year-on-year), marking the first decline in nearly four years. All in all, the economy grew 0.2% in 2019, down from 0.8% in 2018.
Supply-side constraints were largely to blame for the fourth quarter contraction. The electricity, gas and water supply sector shrank for a second consecutive quarter, as a series of breakdowns in Eskom’s coal power plants triggered an escalation in rolling blackouts in the quarter. As power outages rippled through the economy, other sectors reported falls in activity with the transport, agriculture, and trade and hospitality sectors being the most affected.
On the expenditure side, destocking amid downbeat demand subtracted 3.3 percentage points from the headline reading, after having subtracted 5.5 percentage points in Q3. Overall, domestic demand fell 4.4% SAAR in Q4, a sharper contraction than the 4.1% decrease recorded in the previous quarter. Notably, fixed investment plummeted 10.0%, contrasting Q3’s 4.1% expansion and marking the worst reading in four years, as the uncertainties surrounding the electricity supply deterred investment. In addition, government spending fell 0.2% SAAR (Q3: +1.4% SAAR), as authorities attempt to rein in the fiscal deficit in order to avoid losing its last investment-grade credit rating from Moody’s later in March. On a more positive note, household spending growth accelerated to 1.4% SAAR from 0.3% in Q3.
Meanwhile, export growth eased to 2.3% SAAR in Q4 (Q3: +3.5% SAAR), likely due to supply-side constraints. On the other hand, imports contracted for a second consecutive quarter amid lackluster consumption and falling investment (Q4: -8.5% SAAR; Q3: -8.9% SAAR). Taken together, the external sector added 3.3 percentage points to the headline reading in Q4, down from the 3.8 percentage-point contribution in the previous quarter.
The economy is expected to expand at a slightly faster pace this year. Household spending is seen picking up and lower interest rates will likely boost fixed investment. A rebound in exports should also support growth. However, fiscal challenges remain high and could worsen if Moody’s downgrades the country’s last investment-level credit rating in March.
With regards to the outlook of the South African economy, Andrew Matheny and Dylan Smith, analysts at Goldman Sachs, noted:
“We recently incorporated our updated global view on the coronavirus shock into our 2020 forecasts for the South African economy, taking our full-year growth estimate down to -0.3%yoy. This assumes a significant negative external demand shock in Q1 and Q2, partially offset by recovery in the second half of the year (implying that the current recession will persist until mid-year). Incorporating today’s data mechanically reduces this forecast to -0.6%, and strengthens our conviction in our updated monetary policy call, which envisages a 25bp cut in March, followed by a further 75bp of easing in 2020. The risks are now tilted toward a more front-loaded and deeper easing cycle.”