Recent analysis of financial data shows what is important to the consumer

At present, gross domestic product, or GDP, is one of the most important measures of South Africa’s economic health. GDP numbers are used to determine whether we are in a recession or an expansion (a growing economy).

When the GDP is growing, a country is generally improving economically: Companies are hiring, and people are working. If the country shows increasing GDP numbers over two quarters, then it is expanding. If a country experiences two consecutive quarters of declining GDP, it is in a recession.

How does GDP affect South Africans and is there cause for concern?

Because GDP influences inflation and interest rates, it affects all South Africans. The effects of a recession are usually high unemployment rates, falling average incomes, increased inequality and higher government borrowing.

If we look at the effects of a recession on employment specifically, the consequences are dire. Some firms will go bankrupt, meaning massive job losses, or firms will cut back on hiring new workers to reduce costs.

Unemployment often affects young people the most, and we are already facing a national emergency in that regard according to Pravin Gordhan. Stats SA’s quarterly survey indicates an unemployment rate of 37,5 percent for people between the ages of 15-34 in the second quarter of this year.

South Africa’s gross domestic product (GDP) growth rate was 3,3% in the second quarter of 2016. GDP was -1.2% in the first quarter of 2016, meaning there are signs of economic improvement. Consequently, the Reserve Bank has revised its growth forecast and it now believes that the economy will grow by about 0.4 percent for the year, rather than zero, which they had previously predicted.

The main contributors to the GDP growth rate were the manufacturing industry and the mining and quarrying industry. Manufacturing increased by 8,1%, largely as a result of higher production in petroleum, chemical products, rubber and plastic products; and motor vehicles, parts and accessories and other transport equipment. Mining and quarrying grew by 11,8%, largely as a result of higher production of platinum group metals.

Some of the contributing factors that led to SA’s recent weak growth can be attributed to factors beyond our control and one-off events. Depressed commodity prices, the drought of 2015/2016 and the self-inflicted electricity deficit, which injected uncertainty into the mining and manufacturing sectors, have hampered the economy.

The good news is that these are mostly in the process of improving; commodity prices are perking up, the drought is working its way out and the power deficit is becoming a surplus as demand management continues and the renewable energy independent power producers (REIPPs) start to feature.

South Africa still fails in its efforts towards economic growth

With the ratings agencies eyes fixed on South Africa, our country’s internal struggles have been laid bare –

Firstly, we need to create jobs, which means the development and support of small and medium sized enterprises. As much as large businesses can drive economic growth, it is only mid- and small-sized firms that are able to establish and sustain job creation on the scale the country desperately needs.

Secondly, we need to show the world, not just the ratings agencies, that South Africa is an attractive investment destination. Our current political situation is not doing our image any favours, nor is the crime statistics. That said however, all is not lost and there are excellent examples of leadership and stature. We have the stability of National Treasury, the effectiveness of the SA Reserve Bank and SARS to rely on to mention a few.

Thirdly, as a nation we should focus on becoming savers rather than credit consumers. One of the risks related to GDP growth is spending. While we need spending to stimulate the economy, if it is done with borrowed funds we are perpetuating the problem. South Africans generally have a very low savings rate.

Our current savings-investment rate of 15% corresponds with 2% economic growth. By contrast, a savings-investment rate of 30% is needed to achieve the touted “miracle” growth rate of 5.4% per year. By doubling the savings rate of the country, we would be able to significantly boost growth. If this investment is in productive capacity and fixed capital, we can achieve sustainable and inclusive growth.

Is it realistic for South Africans to achieve a 30% savings rate?

Ordinary South Africans are under pressure, making this a tough goal to reach.

Inflation has exceeded the 3%-6% target range for seven of the past eight months with a flickering of hope in the most recent data from Stats SA that showed the headline CPI (for all urban areas) annual inflation rate in August 2016 was 5,9%.

As a nation, we have assumed far too much debt and a staggering number of South African credit-active consumers have a negative credit record. The number of civil summonses issued for debt increased by 3,4% in the second quarter of 2016 compared with the second quarter of 2015.

This has been accelerated by the current economic climate that had seen people drowning in more debt and thus having to pay more towards interest rate; and creditors entering into reckless lending and repayment arrangements with the consumers.

And no wonder they are struggling if you consider the rise in food price inflation.

The latest yearly baseline produced by the Bureau for Food and Agricultural Policy (BFAP) showed that the monthly cost of a basic food basket rose by 23.8% year-on-year in April.

Officially, August’s food price inflation came out at 11.6% y/y, slightly above the previous month’s 11.5% y/y as processed food price inflation rose to 11.3% y/y from 10.4% y/y. Sugar, sweets and deserts price inflation rose to 20.7% y/y from 15.5% y/y, while the bread and cereals category rose to 16.0% y/y from 15.1% y/y on the drought.

Food inflation is estimated to average 10.75% in the first three quarters of 2017.

The fuel price hike later this week will also not help to ease the increase in food and other inflation.

 

What is currently still reason for concern in the current South African economy?

Drought still continues to be a challenge for most parts of the country and it might take time to recover due to lack of rainfall. According to the inter-ministerial task team on drought, dams across the country were at their lowest levels in years. In 2015, the national dam levels were estimated at 64,3% of normal full supply and have dropped to 53,0% as at 05 September 2016. The water restrictions have been imposed across provinces and government has advised citizens to use water sparingly at all times. Current indications were that above-normal rainfall and temperatures could be expected during the early summer season (November, December and January).

Secondly, corporate investment. We have a great and well diversified corporate sector that’s in a good financial position but is lacking in confidence. The key to unlocking South Africa’s growth is to inspire business confidence to get the business community to invest more into South Africa. An improvement in the political situation will go a long way to remedy this situation.
Reasons to be optimistic
Interest rates
The Reserve Bank seems to have changed its tone by suggesting the interest rate cycle may have peaked.

If the USD/ZAR exchange rate holds up, interest rates are very likely to remain unchanged when the Monetary Policy Committee (MPC) meets in November.

ZAR/USD exchange rate
On Wednesday 21st September the rand was the strongest performing currency worldwide, strengthening +2.42% against the US dollar in a single day. In the year-to-date the ZAR has gained 14.0% versus the dollar, one of the strongest performing currencies worldwide.

Investment downgrade
Moody’s rating agency analyst Zuzana Brixiova said “Fundamentally we expect that the probability of a downgrade is less than 50%, it’s about one-third.”

 

Moody’s, which rates SA two notches above “junk” status and one notch above fellow rating agencies Standard & Poor’s and Fitch, will announce its rating decision on 25th November. Moody’s rating decision is likely to hinge on the pace of economic growth during the second half of the year, the level of fiscal prudence displayed at the Medium-Term Budget Policy Statement in October and the financial burden of state-owned enterprises. In addition, Brixiova stated that Moody’s would pay close attention to political developments, which it cited as a major source of credit weakness.