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South Africa’s GDP figures are much better than expected. In fact, the seasonally adjusted annualized figure of 66% QoQ is even better than the industry’s best expectation, said Maarten Ackerman, chief economist and advisory partner at financial services company Citadel.
The local economy experienced a rebound in Gross Domestic Product (GDP) during the third quarter of 2020, data from StatsSA showed on Tuesday (December 8). GDP increased 66.1% quarter-on-quarter annualized (seasonally adjusted).
The 13.5% growth for the quarter was the first positive performance after four negative quarters.
“It has definitely been a positive surprise that has been well received by the market, as we can see from the positive movements in the rand exchange rates, as well as the bond market,” Ackerman said.
“However, it is important to understand that this number is the result of a very specific cocktail. In looking at this, the first ingredient is obviously the fact that we are measuring growth from a very, very low base because GDP more than halved in the previous quarter.
“Now we are measuring from that blocking setback and comparing it with the opening of the economy. As a result, we see extremely strong rebound numbers. “
As an example, looking at restaurants over the period, the sector is up 7,000%, clearly demonstrating the importance of putting growth in perspective. Going from being closed and deep down, to suddenly reopening for business has resulted in a massive base effect, which is visible in these numbers.
The second ingredient in the cocktail lies in the fact that not only has South Africa opened up, but so have our trading partners and the rest of the world – a welcome tailwind, the analyst said. “Then we can drop into the cocktail the fact that we have been blessed with fewer days of load reduction, which means there are no more obstacles to the economy.”
Each of these factors has contributed to better-than-expected growth, Citadel said.
Currently, the year-on-year growth number is -6%, which still indicates the severity of Covid-19 and the impact of the lockdown.
“We can safely assume more positive growth (most likely one digit higher) for the fourth quarter of 2020, but with a much weaker base effect. This would result in a total number for 2020 close to -7.5% as a result of the previous negative growth followed by the lockdown ”.
Impact of Covid-19
Ricardo Smith, investment strategist at Absa Global Investments & Solutions, said that the impact of the Covid-19 pandemic is twofold; In the short term, there have been losses in revenue and income as a result of trade restrictions.
In the longer term, the consequence has been the liquidation of companies, levels of structural unemployment and the deterioration of debt levels. “Therefore, we expect the economy to continue on its recovery path as the spread of the virus slows down; however, we continue to expect economic growth to be below full economic potential until structural reforms occur, ”Smith said.
He warned that the second wave of infections and the ensuing political response remain the biggest threat to the economic recovery in 2021. “If a second wave of infections occurs, it will be a tough balancing act between fiscal and economic reform and the spread of the virus one more time. “
Bloomberg’s median expectation is that the South African economy will contract by 8.1% in 2020 before recovering to record positive economic growth of 3.8% and 2.0% in 2021 and 2022, respectively.
Each sector grew … some more than others
The three super sectors experienced growth with the primary and secondary sectors, which were further constrained by the lockdown, seeing massive contributions to the growth of the economy (up 172.9% and 155.6% respectively), Citadel noted.
There was also a significant contribution from the tertiary sector (up 37.6%), although to a lesser extent, probably because it includes many of the essential services that were open during the closure.
The best contributors were Mining, Manufacturing, and Commerce, which is clearly a reflection that those industries were back on track after the global economy closed and opened.
Even agriculture, which, as an essential service, had been the only sector that had grown during the first two months of closure, registered a very worthy 18.5%.
“Building on an already high base and with good harvests reported, it is reassuring to see that agriculture can show such strong positive growth. An additional advantage lies in its ability to create jobs, “said Ackerman.
Expenditure on GDP exceeds two-thirds growth
The consumption side of the economy increased nearly 68% qoq, seasonally adjusted, annualized.
Looking further, the largest contributor was the export sector, which is a reflection of the opening of the economy, the opening of ports, and the resumption of the rest of the world.
“We expect that number to carry over to the fourth quarter, again given the massive base effect, but we must bear in mind that in the fourth quarter we have seen a second wave in many parts of the world with partial closures being implemented again, so some caution is advised, ”Ackerman said.
Citadel said it is encouraging to see household spending rise nearly 70%. “Given the many job losses that the economy has suffered, it is comforting to see that consumers are also recovering.”
Restaurants and hotels have performed particularly well as the economy has opened up, he said. Alcohol and tobacco have also performed very well, as the ban on these products has been lifted. Most other consumer goods have produced strong numbers.
Industries that were already positive in the second quarter have seen smaller increases in the third quarter, such as utilities, communications and education, but remain in positive territory.
A very small contribution from public spending that will help address the fiscal situation is also nice in this environment.
Imports fell 1.6%, due to lower imports of textiles, chemical products, prepared foods, beverages and tobacco products. “To explain that a bit more, it is not just a reflection of a weak consumer. The decline in textile imports is the result of the push to bring textile manufacturing back to South Africa.
“Many of the clothing retailers are turning again to locally produced clothing, to diversify the supply chain and choose not to rely entirely on Asia. So this is a positive and more permanent decline that Citadel has noticed in that sector, ”Ackerman said.
Gross Fixed Capital Formation has increased by 26%, again coming off a very low base of -59.8% in the second quarter. “It is always encouraging to see a good number on this front because that is the first step that the economy must take to generate productive capacity that will pave the way for better growth in the future.
“This number has historically been more negative than positive, which is a reflection of the structural problems and political uncertainty facing the country. One can only hope that by addressing corruption, coupled with some policy reforms, this number will not just be a reflection of the base, but that we will see more positive growth in the coming quarters, “Ackerman said.
“Our discussions with the National Treasury highlight the difficulty in salary negotiations. Employee compensation has increased from 32% of revenues in 2007 to about 46% in 2019 compared to social benefits of 15%, ”said Rukayat Yusuf, Bank of America (BofA) Sub-Saharan Africa Economist and Strategist Global Research.
“We see an increasing probability that the Labor Appeals Court will rule in favor of the unions, demanding wage increases of 37 billion rand. The Treasury has proposed a settlement offer of R27 billion, but this would still be an advantage to our consolidated deficit projection, currently at 15.9% of GDP.
“We expect the Treasury to have more flexibility in the new fiscal year 21-23 pay deal, although there will most likely be a compromise result amid strong union pushback.”
It may seem rosy, but don’t be fooled
In summary, Citadel said the impression is positive and could help generate a better growth rate for the full year, but, at -7.5%, “we still expect a relatively high negative figure for 2020 overall.”
“What this does is pave the way for the rebuilding of the economy, yet we must not lose sight of the fact that we still need to see the structural problems that are being addressed. From the fiscal cliff we face to the government wage negotiations, things continue to look bleak and political reform remains as urgent as ever. “
If the country can address the structural issues, turn around Eskom, and continue down this path, then 2021 may be a year where we produce closer to potential capacity, maybe even above capacity, but it’s about the sustainability of that growth.
“We need to reach a positive and sustainable growth point by 2022, before we can gain momentum to support and address issues such as deficits and unemployment.
“We are facing a crucial phase of reform implementation,” Ackerman said.
Citadel said the good news is that the economy is improving than expected.
“The bad news is that we still have a long way to go and a huge amount of work to do to get there. We cannot stop addressing our structural problems, implementing policy reforms and eradicating corruption, ”Ackerman said.
“Looking ahead, the growing concern is the possibility of a second wave of infections and the politics that will be required if this manifests. With the prospect of multiple vaccines being approved worldwide, it may be a matter of time before we see industries return to full capacity and growth levels normalize in South Africa, ”said Luigi Marinus, Portfolio Manager from PPS Investments.
Bank of America’s Yusuf said: “We expect momentum to likely decelerate dramatically in the fourth quarter, but nevertheless we estimate that the 2020 recession is now approaching -7% relative to our baseline in -8.1% “.
She said daily cases of Covid-19 are on the rise, but death rates are low and hard locks are unlikely to return. “We continue to project a 2.9% rebound in 2021, reflecting a base effect rebound and an improvement in national and international demand (2022: 1.5%).
“The SARB should find comfort in the recovery as it watches the second wave and the fiscal trajectory. So we see rates unchanged at 3.5% through 2021 with benign headline inflation at 3.7% in 2021 and 4.2% in 2022. “
Read: Analysts warn South Africa could see further downgrades in 2021
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