<strong>By: FNB</strong>

SA’s real GDP contracted by a seasonally adjusted annualised rate (saar) of 0.6% during the third quarter of 2019. This outcome was in line with our expectations, but worse than the Bloomberg consensus of a flat reading.

On the production side, agriculture declined by 3.6% q/q mainly due to a fall in the production of field crops. Mining production also declined by 6.1% q/q, chiefly as a result of falling production in coal, platinum group metals and iron ore. The primary sector deducted 0.6 percentage points (ppt) from overall GDP growth.

Production within the secondary sector was no better, with manufacturing contracting by 3.9% q/q mainly driven by declines in iron, steel and metal products; petroleum, chemical and plastic products. Production in the utilities sector fell by 4.9% q/q, as demand for electricity was weighed on by the combination of subdued mining and manufacturing activity in 3Q19. Unsurprisingly, construction output declined by 2.7% as activity within the residential and non-residential buildings sector remained weak. This is in line with the FNB/BER Civil and Building confidence indices which are at historically low levels.

Due to linkages to primary and secondary sectors, transport was the only tertiary sector which recorded negative growth (-5.4% q/q). Encouragingly, trade volumes bucked the trend and grew by 2.6% q/q. In our view, a sizeable portion of sales volumes have been driven by interest-free lay-by sales, deep discounting, lower borrowing costs and a benign inflation backdrop. Growth in the finance sector has remained resilient despite the challenging economic environment, largely due to the inelasticity of sector’s service offerings as well as a strong appetite for credit by households. Government sector growth was mainly due to increased employment, particularly in higher education institutions and provincial government departments.

From an expenditure perspective, growth in household consumption expenditure slowed considerably to 0.2% q/q, from an increase of 2.6% in 2Q19. This is in line with low consumer confidence and a rising unemployment rate. Furthermore, ailing corporate margins and the lag effect from fiscal drag implemented in April this year has likely kept income growth constrained, and consequently household consumption expenditure weak.

Government expenditure slowed to 1.3% q/q in 3Q19 from 2.8% previously. We expected a more pronounced slowdown, given that the boost in Q2 was election-related. Looking ahead, we expect to see a declining pattern in government consumption amid deteriorating debt dynamics.

Gross fixed capital formation registered yet another quarterly increase in 3Q19, coming in at 4.5% q/q, from 5.8% in Q2. Investment growth was evident for Machinery and equipment, Other assets as well as Transport equipment. We suspect that the positive momentum (attributed mainly to private sector fixed investment) is related to the replacement cycle which likely continued in Q3. It is for this reason that we expect to see a slowdown in private sector fixed investment over the near term.

Net trade contributed positively to overall growth after exports of goods and services increased by 3.5% q/q and imports contracted by 6.8%.

Looking ahead, we forecast year-on-year growth for 2019 at a mere 0.3% and temperately lifting to 0.9% and 1.2% in 2019 and 2020 respectively.