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SA out of recession,

but still limping along

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Alwyn van der Merwe

Director of Investments

South Africa is no longer technically in a recession – Statistics SA announced earlier this month that gross domestic product (GDP) grew by 2.5% in the second quarter of this year. Business and consumer confidence remains at all-time lows, however, and there are no indications that this will change anytime soon. Unless government, business and labour jointly put forward a considered plan for meaningful structural reforms to stimulate growth and address our unemployment rate, which is at an alarming 28%, our economy will at best continue to merely limp along.

According to the figures released by Stats SA, our economy grew both quarter on quarter as well as year on year. It expanded at a seasonally adjusted annual rate of 2.5% in the second quarter of this year (after growth of -0.7% in the first quarter of 2017 and -0.3% in the last quarter of 2016, which nudged us into recession). On an annual basis, real GDP improved marginally by 1.1%.

Although our economic rebound was indeed stronger than was widely anticipated, it’s important to remember that it was off a low base and largely the result of aggregation of a number of small, cyclical factors – we haven’t seen anything to suggest a sustainable trend. The biggest contributor to our second-quarter growth was the agricultural sector, which grew by 33% with the fading impact of the severe drought that had been crippling the sector.

In addition, the global economic recovery certainly benefited our export sector. Volumes – boosted by improved global demand and favourable terms of trade – increased to a seasonally adjusted annual rate of 14.4% in the second quarter of 2017, from -3.2% in the first quarter.


Unfortunately however, both business and consumer confidence levels have remained depressed. In fact, they are now approaching the levels reached in 2008, 1998 and 1994 – periods of dire global economic conditions. According to the latest RMB/Bureau for Economic Research (BER) Business Confidence Index survey, South Africa’s business confidence is now at levels not seen since the 2009 global financial crisis – the Index fell by 11 points to 29 in the second quarter of 2017. Consumers have also lost faith in our economic prospects – the FNB/BER Consumer Confidence Index fell from -5 in the first quarter of the year to -9 in the second.

The problem is that traditionally, the driving engine of economic growth in South Africa has been consumer spend. But with job creation under pressure, the likelihood of subdued salary increases in a tough economic environment, and high individual tax burdens, there is not much scope for consumer spend to increase over the short term. Our population is growing at a rate of around 1.6%, so theoretically there should be much pent-up demand in our economy. But if we’re not generating enough growth to absorb our increasing population into the labour market, it leads to social problems, not demand.


The one number we always look at is gross fixed capital formation (GFCF), which indicates how much both government and private sector are investing in production capacity. Private sector GFCF has been declining over the past year, and in the second quarter of 2017 it decreased by 2.6%. Over the last few quarters we have therefore essentially not created any new capacity to grow the economy. This implies that even if consumer demand should recover, and all other things being equal, the supply side will have limited capacity to respond to the higher demand.

Another factor hampering growth is our economy’s strong reliance on labour over capital to produce goods. Given South Africa’s low levels of labour productivity, however, this is not the most efficient use of resources.


So despite our local economy edging its way out of a recession, the picture is far from rosy. What we urgently need is for government, business and labour to move beyond lip service and actively collaborate to implement a series of interventions to address the structural issues and turn our economic tide around. We have witnessed very little, if any, convincing new initiatives from government at a time when it is crucial to tackle challenges such as unemployment and skills development, and promote growth.

What does all this mean for investments? Our poor economic performance and bleak outlook have resulted in many predominantly South African-based companies (those that don’t earn most of their revenue offshore) trading at a discount to the market, for example local construction firms. In the event of a cyclical stimulus or recovery there is much scope for these companies to do well.

In constructing a well-balanced investment portfolio, investors should therefore not ignore some of these local household names that are now trading at very cheap levels. Any positive surprise on the macro front will be good news for them in terms of earnings and therefore also share price performance. At SPW we’ll certainly be considering adding some of these local shares to our clients’ portfolios where the opportunity presents itself.

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