For three years now, first-quarter GDP growth has been negative, and yet it seems to shock the market every time.
Most, but not all, economists had expected a negative number for this quarter, but the 2.2% quarter-to-quarter contraction was a great deal more negative than had been expected, even by the most pessimistic of analysts.
So too was the 0.8% year-on-year figure, which is a better guide to the outcome for the full year and was also far lower than expected, putting question marks over forecasts that this year’s growth could go as high as 2%. That outcome would require the economy to sustain average growth rates of 2.5% for the next three quarters.
So why did everyone get it so wrong? Are the economists or the statisticians at fault, or are the consistently unexpected numbers telling us something about the economy that we didn’t know?
Like most other economists, however, Citi economist Gina Schoeman expected the services sector, which is traditionally a mainstay of the economy, would lift the growth rate. In the event it did, but only just
One problem for the forecasters is that only 40% of the economy is "visible", in the sense that Statistics SA provides monthly data on these sectors, which include manufacturing, mining and retail. The other 60% is ‘invisible", as it were. That’s not necessarily an excuse in this case, because based on the visible sectors, it was clear the first-quarter number was going to be negative, and significantly so, says Citi economist Gina Schoeman, whose growth tracker model two weeks ago pointed to a negative 2%.
Like most other economists, however, Schoeman expected the services sector, which is traditionally a mainstay of the economy, would lift the growth rate. In the event it did, but only just: government, personal services and finance were the first quarter’s three best performers, but none of them grew by even 2%.
And no one, it seems, expected agriculture to be as negative as it was, even though they arguably should have. Agriculture was recording unprecedented 20%-30% quarterly growth rates in 2017, with record maize crops.
It had to end, and it did, with the sector contracting as much as 24.2%, not only because it came off a high base but also because the first quarter is traditionally the time for crops such as wheat in the Cape, which were hit by drought.
These "base effects", as economists call them, loomed large in the first quarter after the fourth quarter surprised everyone with a much larger than expected positive of 3.1%.
The trouble was that Statistics SA did extensive revisions to the numbers in the fourth quarter, based on better and more extensive data, so it said. Lots of revisions tend to create trouble for the economists’ models, which is one reason why they have been getting it wrong.
Technicalities aside, however, the shape of Tuesday’s figures points to some disturbing and more structural trends in the economy, on the production and the spending sides (Statistics SA measures both).
The government was the biggest positive, with the 1.8% quarterly attributed to higher employment — quite the opposite of what’s supposed to be happening given public spending curbs. However, much of it was temporary, in terms of "temps" employed by universities to help with registration or marking as well as by the Independent Electoral Commission to help out with voter registration.
Agriculture and mining were the biggest negatives. If there was a reminder, though, that the fortunes of a sector so small it accounts for just 2% of the economy could be so big a driver of growth, it has been in agriculture’s huge effect on GDP, positive and negative, over the past couple of years.
Business Unity SA was quick on Tuesday to make the link with policy uncertainty, saying the ANC’s December decision to pursue expropriation without compensation "did not create the requisite environment to encourage investment in agriculture", and that unresolved issues around the Mining Charter did not instil confidence either.
Mining and manufacturing are key export sectors and so the big negatives there were paralleled in a steep 16.5% in exports. The strong rand probably didn’t help, but clearly SA is not taking advantage of a favourable global environment to export more.
Imports contracted too, as would be expected when investment is not growing and businesses are not importing plant and equipment, as indeed they weren’t in the first quarter, when investment spending (measured by gross fixed capital formation) went back into the red again. It has been negative for 10 of the past 17 quarters. No wonder the productive capacity of the economy is shrinking so fast that the Reserve Bank now puts the potential sustainable growth rate at just 1.3% — less than population growth.
The boost in confidence engendered by SA’s change in political leadership will have to start translating fast into higher rates of investment if the slide is to be reversed — and that’s really the message of the first-quarter shocker. The second quarter should see a bounce, in part thanks to base effects, but we are again looking at sub-2% growth in 2018.
On the upside, big negative growth numbers tend to focus the minds of policy makers, and that is what is needed now. No one should have expected the "Ramaphoria" to affect GDP so early, and arguably his new administration has sent the right signals so far.
But unless — and until — it starts to make real changes to the environment in which private sector firms have to do business, SA’s economy will remain sluggish.
• Joffe is editor-at-large.
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