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Experts welcome GDP growth, point to what still needs to be done

Mar 06 2018 21:00
Carin Smith

Cape Town - A modest growth recovery is anticipated for the South African economy, but the implementation of structural reform is necessary to propel the economy to a higher growth platform over time.

This was the reaction of Momentum Investments economist Sanisha Packirisamy to the latest gross domestic product (GDP) data released by Statistics SA on Tuesday.

The South African economy grew by 1.3% in 2017 compared to 2016 and following an increase of 2.3% in the third quarter of 2017. The annual growth exceeds National Treasury’s expectation of 1% growth announced during the National Budget Speech in February.

More than half of the growth number came from the primary sector with agriculture and mining expanding by 17.7% year-on-year (y/y) and 4.6% respectively. There were strong showings by the transport, finance and personal services sectors, which expanded by 1.5% y/y, 1.9% and 1.2% respectively.

In line with tighter fiscal conditions, government GDP expanded just 0.3% while government expenditure grew by just 0.6%. Total fixed investment rose mildly to 0.4% y/y driven mainly by the mining sector. Household expenditure expanded by 2.2% in 2017 from just 0.7% in 2016, with a recovery amongst durable and semi-durable goods.

"Since the favourable outcome of the ANC national conference in December 2017, a number of positive changes have transpired, including an attempt to begin to restore good corporate governance at key state-owned enterprises (SoEs), a fiscal correction through larger expenditure cuts (outside of higher education), the removal of underperforming ministers in Cabinet and an ongoing investigation into state capture," said Packirisamy.

"Political shifts have lifted SA investor sentiment, but for growth to be maintained at a higher level, there needs to be a sustainable boost in consumer and business sentiment."

Momentum Investments expects a robust global economic recovery to support higher export growth, while consumption and investment may benefit from positive economic and political momentum.

Momentum Investments expects growth to average 1.8% for the next three years, increasing above 2% in the outer year.

Jason Muscat, FNB senior economic analyst, Jason Muscat, said GDP surprised to the upside, beating even the bullish expectations.

He cautioned, however, that there were notable patches of weakness, particularly in the secondary sector, which did not add to growth.

Manufacturing production contracted by –0.2% y/y and construction by –0.3%, while the utilities sector barely registered any growth at just 0.2%.

"The trade, catering and accommodation sector also had a poor year, contracting by –0.6, although the low inflationary environment coupled with better consumer confidence and a potential rate cut later this month [can act] as a tailwind for the consumer," said Muscat.

"There is reason for optimism as much of the weakness occurred in the first half of the year, and 2018 growth is likely to continue building on the current momentum."

Nedbank Group's Economic Unit commented that, despite the recent improvement in real GDP growth and its forecast for higher growth overall this year, economic activity is still relatively muted and not at a level that would pose a threat to demand pull inflation.

It pointed out that recent price data shows softer producer and consumer inflation numbers, which are supportive of an interest rate cut.

"If the firmer rand trajectory is sustained, it could lead to an early interest rate cut. Our forecast is for a 25 basis point reduction in March. Thereafter, the rates are expected to remain steady until September 2019," the unit said.

Lukman Otunuga, research analyst at FXTM, said that while the SA economy still has some distance to go when it comes to realising its economic potential, if economic announcements can maintain this type of momentum it will increase sentiment towards the SA economy.

"The stronger than expected GDP reading could also reduce fears of another credit downgrade. It can be added that the rand reacted positively to the data announcement," he said.

According to Citadel chief economist and advisory partner Maarten Ackerman, the GDP growth momentum will help to support the fiscal targets set in Budget 2018.

He noted that growth in household expenditure of 3.6% in the final quarter of 2017 is particularly encouraging, demonstrating that SA consumers “are not down and out”.

“The recent rebound in business and consumer confidence following changes in political leadership should support this momentum into 2018, further driving economic recovery,” said Ackerman.

Rian le Roux, strategist at Old Mutual Investment Group, said looking into 2019, chances are that GDP growth will now equal or exceed 2% on account of a revival in confidence, the higher base of last year’s GDP, subdued inflation and the possibility of a moderate lowering of local interest rates by the Reserve Bank.  
 
"However, while prospects are certainly brightening for 2018, one must not forget the headwinds still faced by the economy and that will prevent an even better growth acceleration," said Le Roux.

These include the notable tightening in fiscal policy in the budget, the drought in the Western Cape, financially constrained households and the risk that the firming rand may unduly undermine business conditions for exporters and companies competing with imports.     
 
In his view, the opportunity now exists to raise the growth potential and bring it to actual realisation - it just requires sensible policies, which are applied quickly and decisively.

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statistics sa  |  sa economy  |  gdp  |  rand
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