Economic Update

Published 02 Jan 2018

A strong mid-year performance helped lift South Africa’s economy out of recession and back into positive territory in 2017. However, factors such as high unemployment and an expanding deficit could rein in growth in 2018.

Agriculture driving economic rebound

On the back of a 0.6% quarter-on-quarter (q-o-q) contraction between January and March 2017, the economy recorded q-o-q growth of 2.8% and 2% in April-June and July-September, respectively. The upturn pushed year-on-year (y-o-y) expansion over the January-to-September period to 1%.

Much of this growth was driven by the agricultural, forestry and fisheries sector, which rebounded from a drought in 2016 to increase by 21.9% y-o-y over the first nine months of 2017. In particular, the sector’s third-quarter expansion of 44.2% was the largest quarterly jump in more than 20 years.

Mining also made solid gains throughout the year, with higher gold and platinum output in the first nine months helping to drive y-o-y expansion of 4.3%.

Elsewhere, the transport and storage sector expanded by 1.2% from January to September, personal services rose by 1.1%, and finance and real estate services edged up by 1%. Manufacturing, however, recorded a 1.2% decline, despite a third-quarter rebound.

Significantly, household consumption continued to expand, rising by 1.4% in the first nine months and helping to boost broader economic activity.

Another positive sign was the recovery of trade figures; the country registered a trade surplus of R51bn ($3.8bn) from January to October, a significant improvement on the R10bn ($742.7m) deficit recorded for the same period in 2016. The strong result was in part due to higher shipments of coal and iron ore, and could be helped further should gold and platinum production rise in 2018.

Inflation also dipped throughout much of 2017, falling from 6.6% in January to 4.8% as of the end of October, according to official statistics. The October result meant that inflation remained under the central bank’s upper band target of 6% for the seventh month in a row.

Investment reforms introduced amid growth downgrade

Despite a promising showing mid-year, concerns over subdued domestic demand, and business and consumer sentiment have prompted an adjusted outlook for the economy.

In November the Treasury revised its 2017 year-end GDP forecast downwards from 1.3% to 0.7%, while 2018 and 2019 growth projections were also scaled back to 1.2% and 1.5%, respectively, down from earlier estimates of 1.3% and 1.7%.

To boost growth moving forward, the government announced a series of privatisation and investment measures, which it hopes will boost economic expansion while maintaining fiscal consolidation.

The Mid-Term Budget Policy Statement, delivered to Parliament in late October, outlined the partial sell-off of state telecoms company Telkom. Malusi Gigaba, the minister of finance, told local media that along with the Telkom deal, the government could undertake more privatisations in the future to help rein in the budget deficit, which is estimated to expand to 4.3% of GDP in FY 2017/18, an eight-year high.

These measures will be complemented by increased infrastructure investment, with the budget statement committing to R948bn ($66.1bn) in spending over the next three years, which is expected to boost activity in the construction sector.

Efforts to promote more activity in the economy were boosted by the central bank’s decision to cut its benchmark interest rate by 25 basis points to 6.75% in July. Despite speculation of a further reduction in September, SARB held its key lending rate steady throughout the rest of the year.

Unemployment rate remains high

The flat economic performance in the earlier part of 2017 also had an impact on employment levels, as the number of unemployed increased over the course of the year.

South Africa’s unemployment rate was 27.7% at the end of the third quarter. While 123,000 new positions were added to the economy over the first nine months of the year, this was not enough to soak up new entrants into the labour market, with the number of those without a job increasing by 5.7% y-o-y.

Despite improvement, growth outlook remains modest

Despite some encouraging indicators and an improvement towards the end of 2017, business sentiment remains muted, according to the findings of the latest Absa purchasing managers index.

The index, which measures manufacturing sector activity, moved up from 47.8 points to 48.6 points in November. While this was the highest score since May, it remained short of the 50-point level that indicates expansion rather than contraction.

Political uncertainty was also a factor weighing on investment, as South Africa’s ruling party, the African National Congress, decided who would take over the leadership from President Jacob Zuma.

However, the successful conclusion of the elections in December coupled with anticipated government reforms is expected to pave the way for positive growth in 2018.