According to the GDP data for the 2nd quarter of 2022, published this week by Statistics South Africa (Stats SA), the economy took a hit of 0.7%, compared to the first quarter of the year.
Closer scrutiny of the Excel data that accompanied the statistical bulletin, however, reveals several anomalies. Depending on which measure is used to deflate current prices for the effect of inflation, no fewer than six GDP growth rates can be calculated – four of them contained in the Stats SA data and two that are based on the consumer price index (CPI) as the deflator, some positive, some marginally negative – confusing indeed.
When relying on the Stats SA dataset for GDP at constant 2015 prices, the quarter-on-quarter growth rate is 2% and the year-on-year growth rate is marginal at 0.2%, yet still positive.
Apart from differences in the method of removing the influence of inflation from the nominal figures, the origin of the confusion lies in the concept of seasonal adjustments at an annualised rate, which Stats SA uses as a benchmark in its media statements.
The latter is based on a formula, but a widely used and unerringly accurate alternative is simply to use year-on-year comparisons.
By definition, this method eliminates the seasonality that is unavoidable with quarter-on-quarter comparisons. For the time being, it is clear that the economy either expanded or contracted marginally in the 2nd quarter and the focus now should be on what is likely to happen during the remainder of the year.
A starting point is to analyse the performance of the sector-specific contributions to GDP during April to June. During this period, a number of unfortunate events conspired to place unnatural pressure on the levels of economic activity, namely the April floods in KwaZulu/Natal, lengthy periods of electricity rationing, lower maize crops and declining prices for key export commodities.
As a result, the primary sectors, which played a crucial role in securing a swift recovery from the worst of the Covid-induced contraction in 2020, did not come to the party this time around. During the 2nd quarter, agriculture and mining contracted in real terms by 20.9% and 9.6%, respectively.
The livestock industry, which accounts for roughly half of the agriculture sector's gross value added, continues to suffer from foot-and-mouth disease outbreaks (mainly in KwaZulu/Natal and North West) and higher feed costs. Maize, which has made a ley contribution to agriculture exports in recent years, is expected to deliver a crop of 15 million tons, down 8% on the previous harvesting season. Fortunately, this is still well above the long-term average yield of 12.8 million tons and also more than sufficient to meet the annual domestic consumption of 11.8 million tons.
Mining’s contraction stands in sharp contrast to the 12% real growth rate recorded during 2021. The sector was hit by a perfect storm in the 2nd quarter, which included flood damage to Durban harbor (no pun intended), inefficiencies with rail transport, lengthy strikes at major mining companies and weaker prices for precious metals and iron ore. Between April and the end of June, the prices of gold, platinum and iron ore declined by 7%; 10%; and 26%, respectively.
Fortunately, however, most of the “big guns” are firing again, led by the largest single contributor to GDP, namely real estate, banking, insurance and business services, with an impressive real growth rate of 4,7% (compared to the same quarter in 2021).
Together with the second largest sector of economic activity, personal services, and the sectors for trade & catering and transport, storage & communication, these four sectors account for almost 60% of the GDP produced by private businesses. All four of them recorded positive real growth in the 2nd quarter.
Another encouraging features of the latest GDP data is the steady increase in capital formation, driven by the private sector, which serves as an indicator of future output. Total capital formation increased by 5.9% year-on-year and for private business enterprises, the growth was an impressive 8.7% (in real terms, deflated by the CPI).
Another clue to the economy’s ability to stay on a growth path has been the exceptional expansion of imports of machinery and equipment, which increased by 28% during the first half of the year to reach an all-time record first semester figure of R172 billion.
Once the war in Ukraine ends and supply chains fully recover from the pandemic, energy commodity prices and global inflation will start subsiding. This should facilitate higher global economic growth and the return of a risk-on sentiment amongst fund managers, which will tend to lower capital market interest rates and eventually allow for more fiscal leeway to fund much needed investment in infrastructure.