Some good economic news was badly needed and the latest GDP figures from Stats SA have delivered that.
GDP increased 0.8% on a quarterly basis in the second quarter, ahead of market expectations of 0.6% and up from the pathetic 0.1% increase in the first quarter. If we compare this year’s first half with last year’s, GDP was up 0.7%.
All of that bodes well for a better full-year this year after last year’s disappointing 0.5%. The latest better-than-expected figures have prompted economists to revise their full-year growth forecasts upwards, to 1% or 1.2% or more, while previously many had expected we would again struggle to achieve even a 1% economy.
Some of the details are good news too. On the production side of the GDP accounts, manufacturing had contracted in the first quarter but came to the party in the second quarter to make the largest contribution to growth. Likewise, mining turned from negative to positive and the trade sector put in a strong performance. Agriculture stayed positive too, after a strong first quarter.
But the expenditure side of the accounts paints a more disturbing picture. The biggest driver of the growth was household consumption, which grew by 0.8% during the second quarter, up from 0.5% in the first quarter.
Stanlib economist Kevin Lings points out household finances have been buoyed by “two pot” pension fund withdrawals as well as by five interest rate cuts since September. He expects the uplift to be “mostly sustained” for the rest of the year. But he warns that the lack of relief in the budget for the impact of inflation on personal tax brackets could dampen consumer spending; so too could higher inflation later this year, and banks’ cautious approach to lending. Most intriguing, Lings notes, is that as much as 70% of the household spending in the second quarter was on clothes and shoes.
Consumption continues to be the driver. But investment continues to decline.
How much can people spend on clothes and shoes? An economy that relies on pure consumption is not exactly on a sustainable growth path. And this is where the second-quarter numbers become quite disturbing. Consumption continues to be the driver. But investment continues to decline. Fixed investment declined by 1.4% during the second quarter, after a 1.5% decline in the first quarter. It has been negative for seven of the past eight quarters and has basically fallen off a cliff over the past decade.
It is investment spending that SA needs to modernise and expand its infrastructure, as well as its factories, farms, mines and data centres. Without investment the capacity of the economy to grow and sustain that growth will continue to decline. Likewise its ability to create the jobs needed to absorb the thousands of new entrants that come into the labour market each year, as well as those already unemployed. For all the single quarter’s good news, SA still has an economy struggling to average even 1% growth, with a population growing at 1.4% — so living standards continue to go backwards each year.
Government and the private sector repeatedly agree that far-reaching reforms are needed to create an attractive environment for investment and drive higher rates of economic growth. We can’t keep saying that far-reaching reforms are needed, and setting out in great detail what is needed, without accelerating the pace of implementation considerably. Transnet’s annual results last week were big on reform narrative, and reforms to open up SA’s rail network and end Transnet’s monopoly are at last coming together.
But the results came as another disappointment on the performance front, with the state-owned logistics group improving the performance of its rail and port services only very slowly. Eskom’s annual results on the same day were somewhat more encouraging, but there is still a long way to go to get the industry reforms properly implemented and ensure a sustainable and affordable power supply for SA.
And energy and logistics are just two of the areas in which growth-boosting reforms are urgently needed. Each new set of underwhelming GDP numbers comes as a fresh reminder of that, even if the latest quarter’s were less underwhelming than the previous quarter’s.
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