South Africa: Economy swings to contraction in Q1
June 8, 2016
Following the slight acceleration in the final quarter of last year, South Africa’s economy swung to contraction in Q1, thus raising concerns that the economy is at risk of falling into recession. Official data released by Statistics South Africa (Stats SA) show that in Q1, GDP dropped 1.2% over the previous quarter in seasonally adjusted and annualized terms (qoq saar), which contrasted the 0.4% increase seen in Q4 2015 and marked the steepest drop in three quarters. The figure shocked the markets, which had expected the economy to contract only 0.1% in Q1. In annual terms, the economy also deteriorated and GDP dropped 0.2%, which was a deterioration over the 0.5% increase tallied in the previous quarter. Against the backdrop of the bleak GDP data, concerns are mounting that the country is at risk of having its credit rating downgraded below investment grade.
Q1’s disappointing figure was due to a deterioration in the mining and quarrying sector, which swung from a 1.4% increase in the fourth quarter to an 18.1% decrease in the first quarter. The sector was hit by severe droughts in the first quarter. Moreover, production in the electricity and water sector dropped 2.8%, which contrasted Q4’s 1.0% increase. Conversely, manufacturing rebounded to a 0.6% increase in Q1, thus contrasting the 2.5% drop recorded in the previous quarter. The agricultural sector contracted 6.5% in Q1, which was slightly better than the 6.7% drop seen in Q4 and marked the fifth consecutive contraction in agricultural output.
This quarter, Stats SA published GDP figures on the demand side of the economy for the first time. In Q1, private consumption contracted 1.3% over the previous quarter in seasonally adjusted and annualized terms, which contrasted the 2.1% increase observed in the previous quarter. Moreover, growth in government spending slowed from 2.6% in Q4 to 1.0% in Q1. As a result, total consumption contracted 0.7% in the first quarter, which was a deterioration over the 2.2% increase tallied in the fourth quarter. Moreover, fixed investment also deteriorated and contracted 6.0% (Q4: - 2.8% quarter-on-quarter saar).
On the external side of the economy, exports of goods and services contracted a sharp 7.1%, which contrasted Q4’s 0.2% increase and marked the steepest decrease in nearly two years. Moreover, imports of goods and services also decreased 7.1% in Q1, thus deteriorating from the 5.0% increase seen in Q4. As a result, the net contribution of the external sector to the overall growth improves from minus 1.4 percentage points in the fourth quarter to 0.1 percentage points in the first quarter.
Author: Dirina Mançellari, Senior Economist