<strong>By:</strong> <strong>Kevin Lings, </strong><strong>Chief Economist, STANLIB</strong>

The recent fall-off in South Africa’s economic performance, reflected in the 3.2% quarter-on-quarter decline in gross domestic product (GDP) in the first quarter of 2019, places enormous pressure on the newly-elected administration. An urgent focus is needed on lifting business confidence, investment and employment.

A breakdown of the decline in GDP shows that the drop in economic activity was extremely broad-based but especially evident in manufacturing, mining and retail. On an annual basis, GDP remained unchanged, after growing by 1.1% year-on-year in Q4 2018.

The figures suggest that the intense focus on South African politics in recent months happened at the expense of the real economy, as many government departments, households and businesses adopted a “wait-and-see” approach.

Under these circumstances tax revenue will suffer, putting the fiscal authorities and State-Owned Enterprises (SOEs) under further pressure.

While the Q1 2019 GDP performance was extremely disappointing, there is still no clear evidence that economic activity has gained any momentum in Q2 2019. (Vehicle sales data for May 2019 was especially weak). The increased spending and growth in temporary employment associated with the running of the National Election in May 2019 would have provided some support to the economy in Q2 2019, but that is obviously transitory.

In addition, the global economic environment trended weaker in recent months, hurt by the ongoing trade dispute between the US and China. The South African Reserve Bank appears to be edging closer to cutting interest rates by 25 basis points which will provide some relief to the broader economy. However, it will do little to boost the country’s overall economic performance and will be largely offset by the impending 13% increase in electricity prices.

In 2019 we now forecast GDP growth of around 0.7%, which is much lower than early 2019 estimates of almost 1.5%. Unfortunately, the risk to the 0.7% forecast in 2019 is still to the downside, given weak business confidence, slowing household income and a weakening global economic environment. Our forecast also assumes a meaningful improvement in GDP growth in the second half of 2019, which is clearly far from certain.

Over the past five years, SA’s economy has achieved an average annual growth rate of only 1%, which is well below the level of growth required to generate a meaningful increase in employment. SA needs to create roughly 600 000 news jobs a year to order to cope with the net increase in the labour force.

More positively, there is a clear intention on the part of the new government administration to lift growth and employment over the next few years. This includes a commitment to restructure and support Eskom, as well as a commitment to resolve the financial difficulties in other key SOEs. There appears to be an acceptance that the survival of Eskom, and the provision of a reliable energy source for the development of the country, will require additional private sector involvement.

It is also positive that the size of the cabinet was reduced and that the minister of finance recently highlighted the importance of reducing salary costs within government and stressed the importance of improving revenue collection. All of these initiatives are to be applauded. However, the success of the government’s growth and employment agenda will be determined by its ability to make progress in implementing real reforms that encourage the business sector.

Closing the gap between the current growth rate of less than 1% and a modest target of 3% on a sustained basis is going to require a significantly larger effort than is currently evident, including the co-ordination of economic policy across key government departments.

Hopefully, the focus of the president and his new cabinet can now start to shift away from ensuring a political revival in SA to encouraging an economic revival.