Official figures released today show that South Africa’s economy contracted by 0.7% (quarter-on-quarter, seasonally adjusted) during the first quarter of 2017. This follows the 0.3% contraction during the last quarter of 2016 and pushes the country officially into a technical recession.
Forget about the technical definition, the reality is that South Africa’s growth has been slipping sharply since 2011 compared to global peers. For the past few years, population growth has also outstripped economic growth which implies that, on a per person basis, the country actually got poorer despite having positive economic growth – that’s sound like recession to me.
The deteriorating economic growth environment is also a reflection of weak consumer and business confidence. This current weak growth environment means less economic activity, less tax generation and collection and further pressure on government revenue and finance.
One needs to remember that the weak numbers released today are a reflection of the activity before the recent government reshuffle and subsequent ratings downgrade. The latest numbers confirm that we will need to do everything in our power to keep fiscal discipline to avoid any further downgrades in the near future.
These numbers also suggest that consensus growth assumption for 2017 – which is around 1% – is probably not achievable. The weak growth numbers coupled with declining inflation suggest that the South African Reserve Bank should be in no rush to hike interest rates anymore. In fact, we might see a cut in rates before the end of this year.
Lastly, the current environment also suggests that the recent strength in the currency is not sustainable and a sharp depreciation in the medium term is becoming more likely to reflect the true, underlying economic fundamentals.
Issued by Citadel Investment Services