Recession Ends in South Africa, But Recovery Expected to Be Slow

The real seasonally adjusted GDP grew an annualised 0.9% in the third quarter of 2009, compared with a revised contraction of 2.8% in the second quarter of 2009. (All quarterly data are s.a.a. quarterly growth rates unless otherwise specified). The main contributors to growth came from the secondary sector and government. The seasonally adjusted real value added excluding agricultural industries for the third quarter of 2009 increased by 1.8% following a decrease of 2.0% during the second quarter of 2009. On an annual basis real GDP stayed unchanged from the second quarter at -2.5% year-on-year (y/y).

GDP Revised and Rebased

The latest statistical release encompasses a change in base year for the national accounts from 2000 to 2005. Growth rates between 2002 and 2008 have been revised, while those from 1993 to 2001 stayed unchanged. The level of GDP at current prices is between 0 and 1.8% higher that the previous estimates for the period 2002 to 2008. A benchmarking exercise led to the broadening of the informal economy to include estimates of the non-observed economy. According to the report, the estimates of the different components of the economy were relatively stable over time, with the formal economy making up 88% of the total in 2008 and the total non-observed economy representing 12% of the economy.

Primary Sector Still in Dire Straits

As could be deduced from mining production figures recently released, the mining and quarrying sector contracted by an annualised 5.8% in the third quarter of 2009 compared with growth of 15.8% in the second quarter of 2009 (see South Africa: 13 November 2009: South African Mining Sector Struggles to Turn Corner). This came despite a 34% and 60% increase in the gold and platinum price respectively so far in 2009. According to the report the contraction in this sector could be attributed to industrial action and routine maintenance. But, besides the fact that deep-level gold mining is by nature very expensive, the relative strength of the currency has by large tempered the benefits of rising dollar price of gold and platinum. High labour costs, electricity woes, and other infrastructural bottlenecks are adding to the currency headwinds in this sector. The outlook for gold production stays subdued as mines are ageing and producing lower-grade ores, but platinum production is expected to recover as the price increases on the back of a global recovery in manufacturing.

Agriculture disappointed again by dropping an annualised 9.8% after a 13.1% contraction in the previous quarter. This is surprising as the total maize crop for the 2008/09 season was close to 12 million tonnes, only marginally down from the record maize crop of 12.7 million tonnes in the 2007/08 season.

Secondary Sector Boosts Growth

According to the report the recovery in the manufacturing industry was led by growth in the petroleum, basic metal and steel sectors as well as in the food manufacturing industries. Following a decrease of 11.1% in the second quarter of 2009, the seasonally adjusted real value added by the manufacturing industry jumped by 7.6% during the third quarter of 2009. This is of great significance, as this sector makes up around 16.6% of overall GDP and accounted for around 30% of the jobs lost in the formal sector in 2009. Showing an improved economic environment, the electricity, gas and water industries grew at an annualised rate of 4.2% during the third quarter of 2009 following growth of 1.9% in the second quarter.

The construction industry added to overall growth once again and posted positive, albeit slowing, growth of 6.1% during the third quarter of 2009 compared with 8.7% in the second quarter of 2009. The government's infrastructural drive will keep this sector going, albeit slowing somewhat as private investment lags the cycle.

Tertiary Sector Shows Slow Recovery

The tertiary sector showed marginal growth of 0.8% compared with a contraction of 1.7% in the previous quarter. This came on the back of an increase in general government services of 4.9% (3.1% previously), personal services growth of 3.5% (3.3% previously) and positive growth of 1.2% (-1.0% previously) in the transport sector. Government spending is acting as a crucial stabiliser in the period of weak domestic demand. The other subsectors, wholesale and retail trade and finance all displayed negative growth, albeit improving from the second quarter. Retail and wholesale trade posted a contraction of -1.1%, improving from -5.9% in the second quarter, while the finance sector improved to -1.5% from -3.8% in the previous quarter.

Outlook and Implications

The economy has finally turned the corner. The figures, although weak, show that the recession is over and that South Africa is following the global trend of improved economic recovery. IHS Global Insight expects this trend to continue albeit at a slow pace. Some concern still surrounds the demand side of the economy. We have clearly not seen the bottom of the consumer debt cycle and with close to a million job opportunities lost in the economy and job creation lagging the cycle by 6-12 months, it will be a while before consumers' financial situation improves considerably. The probability of stellar electricity hikes in 2010 coupled with no further monetary loosening will impede consumer confidence further. The supply side will benefit from an economic take-off in South Africa's major trading partners and a domestic inventory build up. Headwinds will however prevail in the form of a strong currency and slow domestic demand. The construction sector has been an important supporter of economic activity throughout the downturn, but contractors are concerned that a lull in business could follow as the hype of activity for the 2010 FIFA world cup dies down. Government is slow in the awarding of new investment contracts and private investment also lags the cycle and is only expected to take off towards the end of 2010. The residential sector should see a slow recovery throughout 2010 as the lagged effect of monetary loosening finds its way to the real economy.

IHS Global Insight's forecast for third quarter annualised growth in 2009 was lower at -0.5%. The rebasing and benchmarking exercise, which led to a revision of historical figures, added some risk to the forecast. Nevertheless, should the current rate of economic expansion continue (0.9% over the last quarter), growth for the calendar year 2009 would be 1.9%. We now expect an annualised growth of around 2% for the fourth quarter in 2009, bringing the average growth for 2009 to -1.8% y/y from the previously expected -2.2% y/y. Growth for 2010 is projected at 2.4% y/y, slightly up from the 2.2% y/y previously expected.