South Africa officially entered recession in 1Q17 with a –0.7% q/q contraction, significantly worse than our already bearish expectations of 0% growth. The weakness was incredibly broad-based, with only the agriculture and mining sectors expanding. Without growth in the primary sector, GDP would have contracted by a massive 2%. The biggest contributors to the decline were the trade sector which contracted –5.9%, and manufacturing (-3.7%).
The extent of the contractions in finance, real-estate and business services (-1.2% q/q) and government (-0.6) also surprised us, but reflect just how weak domestic demand and investment is. On a more positive note, the slowdown in government reflects the ongoing push toward fiscal consolidation, but does not bode well for overall growth going forward.
On the expenditure side, final consumption expenditure by government contracted –1%, while household consumption dipped –2.3%. Gross fixed capital formation slowed from 1.7% in 4Q16 to 1%, with less spending from SOEs. Households spent significantly less on clothing (-12.7% q/q, likely on tighter credit conditions), recreation (-8.5%) and restaurants and hotels (-8.6%), indicative of how much pressure there is on households budgets.
Our concern is that the numbers are backward looking, and don’t reflect the confidence shock we expect post the cabinet reshuffle and credit downgrades. In this context, it is little surprise that unemployment rose to 27.7% in 1Q17, and could deteriorate further in 2Q17. We don’t expect the figure to put a rate cut on the table, but it may give Moody’s something to think about.
Issued by FNB