South Africa: Economy unexpectedly contracts in Q3, hurting rand
The economy shrank in the third quarter after escaping technical recession in the second quarter. GDP fell 0.6% in Q3 over the previous quarter at a seasonally-adjusted annualized rate (SAAR) after rising a revised 3.2% SAAR (previously reported: +3.1% quarter-on-quarter SAAR). The result confounded market expectations of a slight expansion, thus weighing on the rand. Meanwhile, in year-on-year, unadjusted terms, GDP growth was up 0.1% after rising 0.9% in Q2.
On the supply side, the downturn was led by the electricity, gas and water supply sector swinging to contraction, as a series of breakdowns in Eskom’s coal power plants triggered the return of rolling blackouts in the quarter. Mining and manufacturing activity also dropped notably. Meanwhile, on the demand side, a winding down of inventories amid downbeat demand subtracted 4.7 percentage points from the overall print in the third quarter, contrasting an addition of 5.3 percentage points to growth in the second quarter. Overall, domestic demand fell 3.3% SAAR in Q3, contrasting the 8.7% jump in the previous quarter. Fixed investment lost steam amid sliding business sentiment (Q3: +4.5% SAAR; Q2: +5.8% SAAR), while private consumption growth decelerated sharply (Q3: +0.2% SAAR; Q2: +2.6% SAAR) as downbeat confidence among households weighed on spending decisions. On top of this, easing government expenditure (Q3: +1.3% SAAR; Q2: +2.8% SAAR) further dampened overall demand.
In contrast, the external sector contributed to growth in Q3, after dragging on the economy in the previous quarter. Exports of goods and services rebounded as the challenging external conditions eased somewhat, rising 3.5% SAAR after declining 1.5% in the second quarter. The turnaround reflected increased overseas sales of vegetable products, precious metals and stones, and vehicles and transport equipment. Meanwhile, imports plunged 6.8% SAAR in the third quarter, after climbing 18.3% in Q2, underpinned by a fall in the purchase of mineral products from abroad. Taken together, foreign trade added 3.2 percentage points to the headline reading, contrasting a 6.8-percentage-point subtraction in the second quarter.
Looking ahead, the economy is projected to gain traction next year as domestic demand picks up amid easing power constraints. Household spending is seen rising more rapidly, while fixed investment is set to rebound amid improved investor sentiment and favorable monetary conditions. That said, challenges on the fiscal front are set to remain high and could worsen if Eskom needs yet more funds.
Commenting on the third-quarter reading, Andrew Matheny and Dylan Smith, analysts at Goldman Sachs, noted:
“Incorporating the Q3 GDP release into our models mechanically decreases our full-year 2019 forecast from 0.6% to 0.4%. It also causes our 2020 forecast to decline from 1.5% to 1.3%. Downward growth revisions coupled with low inflation, which we expect to continue undershooting the mid-point of the SARB’s 3-6% target range, support our forecast for 50bp of rate cuts in H1 2020, with risks to this forecast increasingly tilted towards a deeper (but potentially more protracted) cutting cycle.”