South Africa: Economy surpasses expectations in Q2, averting technical recession
South Africa’s economy escaped technical recession in the second quarter, bouncing back from the first-quarter’s marked contraction, leading to gains in the rand. According to South Africa’s Statistical Institute, GDP rose 3.1% in Q2 over the previous quarter at a seasonally-adjusted annualized rate (saar) contrasting Q1’s revised 3.1% saar contraction (previously reported: -3.2% saar). The result surprised to the upside, with most analysts having expected a softer rebound. Meanwhile, on a year-on-year basis in unadjusted terms, growth climbed to 0.9% after the previous quarter’s flat reading. On the supply-side, mining and finance led the turnaround, which was also aided by a rebound in the utilities and manufacturing sectors as gold prices climbed sharply in the quarter and challenges around electricity supply eased somewhat. Moreover, the contraction of the agriculture, forestry and fishing sector softened.
Easing constraints on power supply translated into gains on the demand side. On a quarter-on-quarter basis, household spending rebounded from a 0.6% drop in Q1 to a 2.8% jump amid a rise in consumer confidence. At the same time, fixed investment increased 6.1% in Q2 following five consecutive quarters of decline (Q1: -4.1% saar), marking the best result since Q4 2017. Improving sentiment buoyed capital spending and reflected a strong upturn in machinery and equipment purchases. A faster expansion in government spending also supported the outturn (Q2: +2.8% saar; Q1: +2.0% saar).
On the flip side, net exports remained downbeat. Exports of goods and services were down 0.7% saar in the second quarter, although this was notably softer than Q1’s 27.0% saar plunge. The drop largely reflected reduced trade in precious metals. Meanwhile, imports of goods and services jumped 18.8% after declining 5.1% in Q1; the rebound was underpinned by a strong increase in the purchase of machinery and equipment from overseas markets, as well as higher imports of mineral and chemical products. Taken together, foreign trade subtracted 5.6 percentage points from the headline reading—a less severe drag from the 6.8-percentage-point subtraction in the first quarter.
Looking ahead, while the latest print provides some respite to the dismal picture, weak PMI and confidence data for the outset of the third quarter warrants caution on the economy’s prospects for the remainder of the year.
Commenting on the second-quarter reading, Sthembiso E Nkalanga and Sonja Keller, analysts at JP Morgan, noted:
“In our view, the solid 2Q GDP growth probably marginally reduces chances for the SARB to cut the policy rate already this month (about a 30%-40% probability). The SARB likely will adopt a wait and see approach as it assesses fiscal developments, including the medium-term budget updates. Our base case remains for a 25bp policy rate reduction during the November MPC meeting–once many of the event risks have faded and growth projections for 2020 probably are trimmed from the SARB’s current 1.8%.”