Is South Africa’s improved business confidence premature?

South African GDP contracts in Q1

Business confidence in South Africa is greatly improved since Cyril Ramaphosa took the country’s presidency, but the South African economy has not yet shown any signs of recovery. In fact, first quarter (Q1) 2018 gross domestic product (GDP) data showed a substantial contraction in the South African economy.

While a marginal contraction in GDP was expected, the figure was far worse than economists had predicted. Q1 real GDP, measured by production, declined by 2.2% quarter-on-quarter following an increase of 3.1% in Q4 2017.

Weakness widespread in the economy

The negative contributors to the figure were widespread with the primary, secondary and tertiary sectors all weighing on the economy. The agriculture, fishing and forestry industry was reported by Statistics South Africa (StatsSA) as having declined by 24.2%, while the mining and quarry industry contracted by 9.9%. The manufacturing industry saw six of its ten divisions reporting negative growth rates, which amounted to a 6.4% aggregate decline within the sector. The construction sector declined by 1.9%, and the trade, catering and accommodation industry by 3.1%.

There were some parts of the tertiary sector that did manage to post modest growth:

• Finance, real estate and business services increased by 1.1%
• General government services increased by 1.8%
• Personal services increased by 1.2%

South African rand weakens in wake of GDP data

The local stock market showed a muted initial reaction to the GDP data, although the South Africa 40 Index did trade well off session highs. But there was a noticeable weakening of the South African rand, which shed roughly 1% against the dollar and the euro, and around 1.5% against the British pound. The weakening of the domestic currency was a direct reflection on the data, as the currency was relatively unmoved leading into the news event. Other emerging market currency peers, such as the Brazilian real and Argentine peso, also traded firmer on the day. The Russian ruble was flat on the day, further evidence that the data was weighing on the rand.