GDP: Economic experts say 0.6% contraction does not add up

Lack of business confidence is the main reason for worse-than-expected third-quarter GDP data. But there is some hope.



Stats SA’s announcement on Tuesday of a 0.6% contraction in GDP in the third quarter of 2019 has confounded most economic experts, who had predicted a much smaller decline in economic activity, and perhaps even a small rise.

It is also a notable reversal of the 3.2% GDP growth experienced in the second quarter.

The key reason was the low levels of business confidence, the London-based Financial Times reported. It said this resulted from increasing government debt, failure to reform struggling state-owned entities such as Eskom and SAA, and infighting within the ruling ANC. 

Annual GDP growth under 1%

The FT predicted a growth rate for the year of 1% or less, which is in line with the South African Reserve Bank’s revised forecast of 0.5% economic growth in 2019. This figure is a major concern as it means that economic growth is below population growth, which will further fuel unemployment in the longer term.

Similar unease was expressed last week (prior to the third-quarter economic data being released) by the International Monetary Fund (IMF):

“With low growth and low job creation, the increasing labour force is projected to exacerbate unemployment pressures, poverty and inequality.”

In an opinion piece published on Wednesday in Business Report, chief economist and advisory partner at asset management company Citadel, Maarten Ackerman, warned that the economy was “now playing in injury time” and the government needed to implement reforms immediately.

It could not wait until the February budget speech to do so, he emphasised.

Ackerman noted a concerning third-quarter drop in the performance of the sectors most likely to create large numbers of jobs: mining, manufacturing, agriculture and construction. Mining was particularly hard hit and dropped by 6.1%.

“This sets an alarming scene altogether, and implies a bleak outlook from an unemployment perspective,” he said.

Consumer spending flat at 0.2%

Another indicator of the struggling economy is consumer spending, which was basically flat at 0.2% growth in the third quarter.

“Consumers don’t have jobs, fuel prices are rocketing, social grants are under pressure – and all of this combined means that people spent less,”

Maarten Ackerman

However, the government is unlikely to attempt to stimulate consumer spending by cutting interest rates or taxes, believes Stanlib asset management chief economist Kevin Lings.

“Normally a country under these circumstances would be cutting interest rates as a way to stimulate, but we struggle to do so because we still need to attract foreign investment,” he told the Mail & Guardian.

A cut in interest rates would mean investors would receive a low return on their investments. He said the government could not afford to cut taxes, because it already had insufficient revenue.

Exports give glimmer of hope

But there were some positives in the third quarter too. Exports were up by 3.5%. The financial and trade sectors showed positive growth, as did the figure for Gross Fixed Capital Formation, which was 4.5%.

“This is the key number to monitor for positive growth. It is an indication of both business and government [being] willing to invest into the economy, and sets the scene for growth in future periods. It is one of the first leading indicators of better growth to come,” explained Ackerman.

He continued: “This turnaround comes after five quarters of quite deep negative movement. Hopefully, this signals a return to investing back into the economy, in line with the foreign direct investment numbers we have already seen, which are themselves a result of the investment drive of President Cyril Ramaphosa.

“If this trend is able to continue, it will pave the way for stronger future growth.”