South African GDP growth in 2017 scales up

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The fourth quarter of 2017 Gross Domestic Product (GDP) came in much better than expected. The consensus forecast was for an expansion of 1.8% at an annualised rate, but the number came in far better at 3.1% annualised.

The previous three quarters’ numbers were revised slightly higher too. The fourth quarter number also significantly boosted GDP growth for the full 2017 calender year to 1.3%, vs. consensus estimates of below 1%. Interestingly, the technical recession, i.e., two consecutive quarters of negative GDP growth, which occurred over the fourth quarter of 2016 and first quarter of 2017, was also revised away with the Q4 2016 number now a small positive.

The sectors that fared best in the final quarter of last year were agriculture, manufacturing, trade, transport/storage/communication, and the financial sector, all of which recorded solid positive growth.

The laggards were mining and construction, both of which contracted on a quarterly annualised basis. These two sectors are, of course, crucial to a sustained better economic growth performance over the medium term.

The key message of the fourth quarter numbers, and for the full calender year, is that the economy was not as weak as was previously thought. Furthermore, it holds the promise of an even better growth year in 2018, especially with business and consumer confidence surging following the election of Cyril Ramaphosa as president of both the ANC and the country. Confidence was subsequently further boosted by the number of key cabinet changes and decisive action to sort out the problems at the state-owned-enterpises.

Looking into 2019, chances are that GDP growth will now equal or exceed 2% on account of a revival in confidence, the higher base of last year’s GDP, subdued inflation and the possibility of a moderate lowering of local interest rates by the Reserve Bank.

However, while prospects are certainly brightening for 2018, one must not forget the headwinds still faced by the economy and that will prevent an even better growth acceleration. These include the notable tightening in fiscal policy in the budget, the drought in the Western Cape, financially constrained households and the risk that the firming Rand may unduly undermine business conditions for exporters and companies competing with imports.

Lastly, combined with the recent politically-driven surge in optimism, the planned return to gradual fiscal consolidation and now the better growth numbers, raises the possibility that Moody’s will not downgrade SA’s local government debt to sub-investment grade at their upcoming review at the end of March.

In summary, the good growth news and came on top of a stream of other good news recently, and policymakers should grab the opportunity to, through further growth-enhancing reforms, turn a cyclical improvement into a structurally higher growth potential and the actual outcome. The opportunity exists, it just requires sensible policies, quickly and decisively applied, to raise the growth potential and to bring it to actual realisation.

Rian le Roux, Old Mutual Investment Group Strategist

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