Real Estate Industry major contributor to GDP
Statistics South Africa on Wednesday announced the country's gross domestic product (GDP) growth rate contracted by 1.2% in the first quarter of 2016, a much steeper contraction than had been expected.
The negative GDP statistics poured cold water on relief that South Africa had avoided a junk status downgrade by international rating agencies.
Fitch on Wednesday maintained the country’s investment grade, as had Standard & Poor’s a week earlier and Moody’s last month. But the Stats SA GDP figures for the first quarter of 2016 to the end of March showed an overall 1.2% contraction.
The main contributors to the negative GDP growth rate were the mining and quarrying industry, transport, storage and communication industry.
Mining and quarrying fell by 18.1%, largely as a result of lower production of platinum group metals and iron ore. Transport, storage and communication fell by 2.7%, largely as a result of a decline in land transportation.
The two other industries that contracted in the first quarter were agriculture, forestry and fishing (-6.5%); and electricity, gas and water (-2.8%).
The strongest performer in value added in the first quarter was Real Estate, Finance and Business services. The industry increased by 1.9%, mainly because of growth in finance and real estate services.
It was an historic GDP release, with Stats SA for the first time publishing production and expenditure side data simultaneously, following a three-year process in which it took over responsibility for producing the numbers previously compiled by the Reserve Bank.
Reserve Bank governor Lesetja Kganyago said in handing over the GDP expenditure to Stats SA, "we join the community of nations" whose statistics agencies compile both sides of GDP. This addressed important governance issues, ensuring the Bank kept its distance from the production of the GDP expenditure, just as it does from the inflation figures, which Stats SA produces.
Expenditure on real gross domestic product fell by 0.7% in the first quarter of 2016, however government final consumption expenditure increased by 1%.
Fitch’s research shows that South Africa’s trend GDP growth remains low compared to that of its peers, with five-year average GDP growth at just 2.2% compared to a BBB median of 3.3%.
Its affirmation comes after S&P delivered a stay of execution on Friday evening, affirming SA's investment-grade rating even though it had it on negative outlook. It also follows Moody's decision in May to affirm SA's rating, following a two-month review process.
GDP growth was 1.2% in 2015 and is likely to slow to just 0.7% in 2016 before recovering to 1.5% in 2017. Growth is held back by constrained electricity supply, concerns about the deteriorating investment climate and fractious labour relations.
Statistics SA (Stats SA) also revised the GDP growth of the fourth quarter in 2015 downward to 0.4%, from the previously-reported 0.6%.
At this stage, most economists expect that the first quarter may have been the worst.
"Our economic growth engine collapsed," said FNB economist Jason Muscat of the contraction in household consumption.
Macquarie economist Elna Moolman said the worry was that the disappointment was "really broad based", with six of the sectors weaker than she had expected, and even the best performing sectors such as finance not reaching 2% growth for the quarter.
Investec Asset Management fixed income manager Nazmeera Moola said the contraction in mining should reverse in the second quarter.
Standard Chartered economist Razia Khan said: "We think that with some improvement in electricity production and hoped for momentum in other sectors, SA may just avert a technical recession."
The Rand pulls back ahead of GDP data
The rand pulled back from the previous session's four-week highs against the dollar on Wednesday and traders said South African GDP data expected to show a small contraction in the first quarter could add pressure on the currency
The rand has gained as much as 5 percent against the dollar since Friday, reaching 14.7995 on Tuesday in a relief rally prompted by S&P's decision to maintain South Africa's investment grade BBB- rating.
The currency, however, gave back some of those gains on Wednesday to trade at 14.9175/dollar by 06h50 GMT, down 0.1 percent from the previous session's close.
Traders saw a risk to the currency from Statistics South Africa's GDP data due out at 09h30 GMT, with economists polled by Reuters expecting the economy to have shrunk 0.1 percent on a quarter-on-quarter annualised basis in the first three months of the year.