IT has by now become clear that the third quarter gross domestic product (GDP) figures, due for release on November 25, will be worrying. But many in the market will have the opposite reaction, as they will look at the data as an indicator that interest rates will be cut sooner rather than later.
It was always clear that the strong second quarter GDP growth figure of 4.9% was an aberration. That high growth rate was the result of the economy bounding back from the doldrums in the first quarter, when the economy - mining and manufacturing in particular - was hard hit by extensive power outages.
But it now seems that even the first quarter's weak 2.1% growth performance might be better than the pathetic growth rate we will see for the third quarter.
The release of several economic indicators over the past few months has cemented the case for an exceptionally weak GDP performance in the third quarter. Real retail sales - long one of the engines of growth of the economy, accounting for 14% of GDP - had a particularly bad quarter.
Statistics SA no longer publishes seasonally adjusted figures, but on a non-adjusted basis, real retail sales fell 4% between the second and the third quarters of this year. This suggests a substantially negative contribution to the GDP number, which is annualised.
Big sector shock
Manufacturing production, which made a big contribution to GDP in the previous quarter, also had a dismal three months. In the September quarter, manufacturing production declined by 2.5% from the previous quarter, seasonally adjusted. Manufacturing contributes about 16% to GDP.
With two big sectors such as manufacturing and retail showing declines in the quarter, the overall GDP number will take a knock. Some analysts are talking of overall growth of less than 1%.
That will of course depend on sectors such as construction and financial services, which have in the past put in stellar performances. But the slowdown in residential construction and the weakness of overall demand in the economy don't bode well for these two sectors. Add to that the fact that the mining sector is struggling, and the picture isn't a pretty one.
It's therefore fairly safe to assume that GDP growth will notch up its worst quarter this year in the third quarter. But - perverse as markets are - this may in some quarters be perceived to be "a good thing", as it may be seen as forcing the Reserve Bank's hand on interest rates.
Many believe the Reserve Bank is now more focused on growth concerns than inflation, which, according to the Bank's calculations, peaked in the third quarter. The question now becomes when, and not if, the Reserve Bank will cut interest rates. A weak GDP growth number will come as strong ammunition for those calling for a rate cut as early as February or even a Christmas surprise.
Scope to ease monetary policy
Actually, anyone looking for ammunition on overall conditions in the economy in the third quarter had an early warning signal in the form of the Quarterly Labour Force Survey (QLFS). Released at the end of October, the QLFS showed that the number of people employed in the SA economy in the third quarter of this year fell by 74 000 compared with the second quarter.
This was an early signal that overall growth in the economy was sub-par, as it wasn't good enough to generate an increase in the number of people employed. The unemployment rate crept up to 23.2% from 23.1%.
Interestingly, it's highly unlikely that you will ever see reference in a Reserve Bank monetary policy committee statement to job losses as a motivation for the monetary policy decision taken.
My bet is that you'll never see a reference to job losses as a reason for interest rates to be cut. This is because the Reserve Bank prefers to frame everything in terms of inflation and doesn't want to send a message that its job is also to generate employment.
But, on GDP, the Bank can always motivate its decisions with reference to "potential output". If the economy is growing below "potential output" - the level estimated as possible if all current resources are employed - this is disinflationary and then there's scope to ease monetary policy.
The potential output of the SA economy is estimated at about 4.5%. But it goes without saying that factors other than GDP also have to be in place before interest rates can be cut.
Nevertheless, next week's weak GDP figures, though cause for concern on the face of it, will be reason for jubilation among interest rate bulls who are looking further ahead. It's a case of the bad news being seen as good news for some...
- Fin24.com