StatsSA announced today the 2021 second quarter gross domestic product (GDP). The economy expanded for a fourth quarter in a row with a 1.2% increase on the previous quarter. The economy expanded by more than 19% compared to a year ago – obviously from a low base. Strong growth coupled with the change in the base year to 2015 (which resulted in the economy being 11% bigger than the previous number indicated) should support a better-than-expected fiscal outlook, which should be pleasing for rating agencies and deter any further downgrades for now.
Below are the key economic insights to make note of.
THE IMPORTANCE OF CONTEXT
Given the recent rebasement adjusting GDP figures, the economy is now considered 11% bigger than what was previously believed. It is important that this is considered for context because most metrics measured as a percentage of GDP will appear better. Another important consideration is that, from this quarter onwards, StatsSA will no longer be reporting on quarter-on-quarter analysed numbers; only quarter-on-quarter as well as annual change.
Annual growth is up by a massive 19.3% compared to this time last year. While this is an impressive figure, we must consider that this is measured off a low base (at the bottom of the decline) and this figure is therefore likely the growth “peak”. We can still expect to see growth going forward, but the annual number is likely to decrease in the quarters to come.
Q2 GROWTH IS UP 1.2%
It’s encouraging to see that Q2 has experienced 1.2% growth since Q1 and that South Africa has now experienced four consecutive positive quarters since exiting the huge decline in Q2 of 2020. Although the growth was less than the expected 2%, the market has not reacted to this with the rand and bond markets remaining stable.
TIME TO AIM BEYOND PRE-COVID LEVELS
Although the economy has made huge strides in moving towards reaching pre-COVID levels, there is still a way to go. If growth continues along these lines, we could reach pre-COVID levels over the next two quarters. While this is positive news, it is still not where economists want the country to be. We must consider that South Africa had been flatlining for most of 2017 to 2019 and we are now only back to 2017 Q4 levels – the real goal is therefore to exceed growth levels just before the COVID decline. This can happen in time, but is only likely to happen towards the end of 2022 if the growth trajectory continues.
Agriculture, the second largest contributor towards growth, is thriving for numerous reasons. It may be a small sector, but it is a huge part of the employment sector. Transport and communication also made a strong contribution, as did the mining sector which is still benefiting off the back of global recovery and an increased demand for commodities. As a result of this, government will be able to determine a better fiscal picture considering that mining companies contribute a significant amount to the country’s tax revenue.
Two important job creation sectors that contracted were construction and manufacturing, and it’s important that these sectors start to reboot themselves urgently.
EXPENDITURE LOOKS POSITIVE
From the expenditure side, exports made a significant contribution again, just as they did in Q1, up 4% continuing to enjoy the tailwind of the past few quarters as the global economy began to open, accompanied by a surge in demand for soft and hard commodities.
Gross fix capital formation is the second biggest contributor, up almost 1% following a volatile series over previous quarters. Economists would like to see this indicator turn around as this paves the way for more confidence, which should support further capital investments that will lead to more sustainable economic growth.
HOUSEHOLD EXPENDITURE SHOWS CONFIDENCE
Household expenditure is up 0.5% and, while this is slightly lower compared to Q1, when looking at household expenditure it appears that most consumers who have a steady income are somewhat managing to make ends meet.
Durable goods experienced the highest growth – a good indication that consumers are feeling more confident about their financial futures as they are willing to spend on these items.
GOVERNMENT CONSUMPTION DECREASED
Encouraging to note is that government final consumption experienced a slight decrease in compared to previous quarters. This was attributed to the decrease in employee compensation as well as spending on goods and services in Q2. Economists would like to see a continuation of this decline. A decline in government expenditure coupled with better revenue collection on the back of the economic recovery will support the fiscal outlook over the short term.
Click here to download the StatsSA GDP media presentation.
Written by: Citadel Chief Economist, Maarten Ackerman