Declining GDP dominated economic news in SA this week

The decline in GDP in the first quarter and the crash in new car sales dominated the economic news in South Africa this week with bad news, although there was a bit of good news with a slight increase in business confidence.

Lisette IJssel de Schepper, chief economist at the Bureau for Economic Research (BER) at Stellenbosch University, says the good news, a slight improvement in the RMB/BER Business Confidence Index in the second quarter, was countered by bad news in the form of an unexpected contraction in gross domestic product (GDP) in the first quarter.

“While we had cautioned that a stagnation or contraction was possible, the outcome was weaker than we (and the consensus) expected. The Absa PMI for May was also disappointing and it remains difficult to make a firm call on GDP dynamics in the second quarter.

“Although we are not expecting a technical recession at this stage and do see growth bounce back somewhat, the upward revision to the fourth quarter of 2023 and poor GDP in the first quarter point to downside risk to our 1.3% full-year growth forecast.”

More bad news was flooding and other natural disasters across the country that resulted in loss of life and damage to property and infrastructure.

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First quarter data suggest sluggish economic activity in GDP

The FNB economists Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano say the GDP data for the first quarter revealed sluggish economic activity, with six out of ten sectors contracting and as a result, the 0.1% quarterly decline in GDP was below their projection of a mild 0.1% expansion.

“All demand components experienced a quarterly contraction, with total fixed investment remaining in a technical recession for the third consecutive quarter. Government consumption also entered a mild technical recession and household consumption contracted by 0.3%, reflecting the ongoing cost-of-living pressures.”

They point out that compared to last year, household consumption spending declined by 0.4%, and compensation of employees fell by 1.6% when adjusted for inflation.

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Crash in new vehicle sales bad economic news

Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, commenting on the trade surplus, say although trade conditions remain unpredictable, exports performed better than imports so far in 2024.

“Exports were supported by the recent moderate rise in commodity prices, as well as the improvement in the country’s power supply and logistics. Given the positive forecasts and the trend thus far, we expect the trade account to remain in a surplus for most of 2024.”

They are concerned about new vehicle sales that came crashing down in May, contracting by 14.2% after the short-lived expansion of 2.2% in April. “The outcome reflects the high-interest rate environment, which is squeezing discretionary incomes and stifling demand for credit in addition to an increase in the number of public holidays over the month and jitters around election outcomes leading to the postponement of purchases of big-ticket items.”

In addition, they warn that South Africa faces another year of patchy economic growth, given harsh operating conditions on the supply front, weak domestic demand and a constrained global landscape.

“In the first half of the year, high interest rates will continue to strain household finances, weighing on consumer confidence and demand. We expect these pressures to start easing slightly in the second half as inflation shifts down a gear and the monetary policy easing cycle begins.

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Inflation expectations and repo rate in economic news

“Inflation is forecast to shift down a gear around mid-year, enabling the South African Reserve Bank (Sarb) to begin cutting interest rates, which should support real incomes and lower debt service costs, lifting consumer confidence and demand.

“Government spending is also forecast to remain positive, but growth in fixed investment is likely to fade in response to the challenging operating environment and subdued growth prospects. Altogether, we forecast GDP growth of around 0.9% in 2024.”

They expect the trade account to remain in surplus for the rest of the year as the recovery in exports outweighs the anticipated rebound in imports later this year.

“Given muted domestic growth, the income deficit should narrow slightly as soft corporate earnings contain dividend payments. The services deficit should remain relatively steady, underpinned by the continued revival in tourism. Altogether, we expect a slightly smaller current account deficit of 1.4% of GDP in 2024 from 1.6% in 2023.”