Nazmeera Moola unpacks this week’s release of the 2019 first-quarter GDP numbers.
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Lindsay Williams: Let’s have a look at an economic data release from the South African economy and, quite honestly, you must sit down now because it is a shocker. The Q1 GDP number was released at 11h30 today by Stats SA and it showed a contraction in the South African economy in that first quarter to the tune of 3.2% and it is more or less across the board. Financial services and a few government services contributed to the upside but the rest of it was simply awful.
With me now is Head of Investments at Investec Asset Management in Cape Town and that is Nazmeera Moola. Really, really a horrible, horrible number, Nazmeera.
Nazmeera Moola: Yes, Lindsay, unfortunately, that is the case. It was a pretty awful number.
Lindsay Williams: And it goes from the primary sector to the secondary sector, to a lesser extent to the tertiary sector and has profound implications. Maybe you could pick out the worst performers from your point of view. I think mining and manufacturing stand out from mine.
Nazmeera Moola: Mining and manufacturing were the worst of it. I think what may be worth considering is what the causes were and there were several of them. First of all, you had late rains in the maize planting area so that is why there was an unexpectedly large decline in agricultural production, which always skews the volume number and doesn’t always translate through to what we see on the ground, but then it was the same quarter where we had the bulk of the load-shedding. So then you had load-shedding feed through into retail sales, wholesale sales, telecommunications, transport and a couple of other sectors.
The third factor that played a role was the weakness in confidence. The fact that you see construction contracting is a reflection of the lack of investment in the economy and that is the longer-term issue that needs to be resolved.
Lindsay Williams: How much do you think load-shedding contributed to the 3.2% fall? In fact, I am going to give you the numbers, first of all, just to put this all into context. Q1 2019 GDP contracted by 3.2% quarter-on-quarter, significantly undershooting (it says in this commentary) the market’s lowest expectation of -2.2%. That is a Bloomberg consensus survey they had and I think that came from a major commercial bank. This follows the 1.4% quarter-on-quarter growth in Q4 of last year. On an annual basis, GDP growth was flat. So those are the cold, hard facts. How much of that do you think can be assigned to load-shedding or are we just using that as an excuse for our inefficiency and our lack of productivity?
Nazmeera Moola: I think load-shedding is probably half of that and the other half is due to the strike in the mining sector in Sibanye, in particular, the cultural issues and then the confidence problems but I think half of it is probably the load-shedding.
Lindsay Williams: Okay, so we haven’t had load-shedding very much in Q2, which comes to an end in about three-and-a-bit weeks’ time. I don’t want to jump ahead because I still want to have a look at this number but, as we are on the subject, do you think there might be a bounce-back in Q2?
Nazmeera Moola: I think there will be a little bit of a bounce-back in Q2 but I think what you are likely to see is a very subdued pick-up. All the (audio)… we get from companies on the ground is that conditions are still pretty tough.
Lindsay Williams: Yeah, they are pretty tough on the ground and for the household as well and, whether this is just the inability to spend or the unwillingness to spend because of the confidence factor that you mentioned earlier on, Nazmeera, because it says here on the expenditure side household consumption expenditure slowed 0.4% year-on-year from 1.1% in Q4 of last year. People are keeping things pretty tight.
Nazmeera Moola: Very much so and actually, on a quarter-on-quarter basis, household consumption contracted and this is the first contraction in consumer spending since Q1 2016. So it ties in with what you say – it probably just exaggerates the effect and I think consumers are feeling (audio)… impact. If we look at household cash balances at the moment as a percentage of GDP, they are now at the highest level since 1994.
Lindsay Williams: There are implications and I have got a list of them here and, if we have got time, the kneejerk reaction is, of course, the weakening rand, going from R14.40 yesterday to its current level of the low R14.70’s against the US dollar, still within its range but, nonetheless, a 30-35 cent weakening is quite significant. Bond markets not doing very much. Do you think they are going to have to wait, these two markets, these two key financial indicators in South Africa before they really digest this number or do you think we have done enough now, particularly with the rand?
Nazmeera Moola: I think there was an expectation it would be a pretty bad but I think the expectation was something more like -2%, so the magnitude was the surprise. I think the concern for the bond market that will grow is the fact that nominal GDP was below 5% year-on-year. Now bear in mind the Treasury in the budgets in February was forecasting 7.2% for the year as a whole (this is the year that starts 1 April 2019) but there is a pretty low run rate in terms of nominal GDP, which also points to the very low levels of inflation in the system.
Lindsay Williams: What are the implications for the debt to GDP ratio? I imagine they must be quite profound.
Nazmeera Moola: Well, if your denominator is not growing and your numerator, which is the debt stock, continues to grow as government takes on Eskom debt and other things, yes, the debt to GDP ratio will rise quite sharply. I think this all points to the fact that we need two things from the government – we need a plan on controlling expenditure but we also need a plan on creating growth so that we see revenues improving while expenditures are more contained.
Lindsay Williams: On that note, there must be enormous pressure, firstly, on the South African Reserve Bank’s Monetary Policy Committee because the next move must surely be down in terms of interest rates in South Africa, again a kneejerk populist sort of feeling from the people I have already spoken to, but also policy on the key ministries in government and the new cabinet ministers. There has to be some action here. It cannot just be monetary policy. It has got to be a more holistic approach. Mr Ramaphosa surely must sit down with them and say: look at these numbers; we are underperforming; we have to do something immediately; get to work.
Nazmeera Moola: I would hope so. I would hope that is exactly what we are going to see happen, is that these numbers are used to galvanise some actual progress and decision-making as opposed to the holding pattern we have been sitting in for more than two-and-a-half years while the ANC sorted out its internal issues.
Lindsay Williams: The next quarter is almost at an end. The second quarter is almost at an end. We won’t get the numbers for quite a while but do you think there is a chance that we go into the 2-month negative growth phase and therefore enter what is known as a technical recession, Nazmeera?
Nazmeera Moola: I think you are going to see a bounce-back in Q2, partially because load-shedding has dramatically improved, partially because there was a really good maize planting with the late rains and that technical shift in the timing will come through and also because strike ended at Sibanye. So I think you will see an improvement into Q2 and we should avoid the technical recession but that doesn’t take away from the fact that Q1 was awful and on the ground, in terms of consumer spending, it still feels pretty weak.
Lindsay Williams: Nazmeera, thank you very much for your time. That is Nazmeera Moola, the Head of Investments at Investec Asset Management in Cape Town.