South Africa’s Economy Snaps Out of Recession, But Is It Out of the Woods?

South Africa, the African continent’s most industrialized economy, saw its share of ups and downs during the administration of former president Jacob Zuma. The February 2018 installation of a new president, Cyril Ramaphosa, has rekindled hopes of an economic renaissance, but the country still faces serious challenges. After seeing two consecutive quarters of economic contraction in the first half of 2018, significant economic uncertainty remains.

The unemployment rate stood at 27.1% at the end of 2018, and an unexpectedly negative medium-term budget statement shook the country in October. Ratings agency Moody’s called the weaker fiscal outlook a “credit negative.” However, Moody’s is the only one of the three major global credit rating agencies that still assesses South Africa’s local currency denominated debt at investment grade. Both S&P and Fitch cut their ratings for South Africa to junk during former President Jacob Zuma’s tenure, which was plagued by multiple cabinet reshuffles and corruption scandals.

Third Quarter Economic Rebound

According to Statistics South Africa, the economy declined by 2.6% in the first quarter of 2018 and by 0.4% in the second quarter (seasonally adjusted annualized quarter-over-quarter growth rates), constituting a technical recession. This was the country’s first recession since 2008/2009, in the midst of the global financial crisis. First half weakness was led by declines in the agricultural, manufacturing, and retail sectors.

However, the economy rebounded in the third quarter, with real GDP growth of 2.2%. The main growth drivers were the manufacturing, agriculture and transport industries. The weak first-half economic performance is expected to result in a 2018 annual GDP growth rate of just 0.7% according to analysts surveyed by FactSet.

Consumer Confidence Surged in Early 2018

A rebound in consumer confidence in the first half of 2018 spurred strong household spending in the third quarter, contributing to the positive GDP number. The FNB/BER Consumer Confidence Index shows that consumers remained consistently negative on the prospects for the South African economy for three straight years (2015-2017). This can be largely attributed to the confidence shock of multiple credit rating downgrades and dismal expectations for household finances during the last three years of Zuma’s scandal-ridden presidency.

However, consumers reversed their views on the prospects of the economy in early 2018 with the election of Ramaphosa, with the sentiment index surging from -8 in Q4 2017 to an all-time high of 26 in Q1 2018. However, the jump in sentiment was short-lived. As parliament debated the controversial land expropriation constitutional amendment, a depreciating rand and soaring fuel prices led to a sharp decline in consumer confidence, with the index falling back to 7 in the last two quarters of 2018.

This renewed pessimism hit the country’s equity market hard. The FTSE JSE ALL Share Index (ALSI) was down 11% at the close of 2018, its worst annual performance since 2008. Looking forward, positive GDP growth should lead to higher household incomes. Combined with lower petrol prices in Q4 2018, this points to an increase in consumer confidence moving into early 2019, which in turn should boost economic growth.

Business Confidence Fell in the Second Half of the Year

While South African consumers are more optimistic than they have been in years, confidence levels among business leaders remain low. While the RMB/BER Business Confidence index jumped to 44 in Q1 2018, this was well below the series’ historical peaks (most recently above 80 in the mid-2000s). Over the last decade, this index has averaged 38.8 and the most recent reading for Q4 2018 was 31.

Many observers see risks in the December 2018 decision by South Africa’s parliament to adopt a report recommending that the Bill of Rights be amended to facilitate expropriation without compensation. President Ramaphosa has pushed for the change, stating in a speech last summer, "The intention of this proposed amendment is to promote redress, advance economic development, increase agricultural production and food security." Critics predict that the policy will be disastrous for the nation’s capital formation and lead to significant declines in economic output.

Looking Ahead

In last week’s 2019 budget speech, finance minister Tito Mboweni painted a bleak picture as he outlined the state of South Africa’s finances for 2019. While the National Treasury predicts accelerating real GDP growth rate over the next three years (1.5% in 2019, 1.7% in 2020, and 2.1% in 2021), both the current account deficit and gross debt are expected to swell. Gross government debt, which has been rising steadily since 2009, surpassed 55% of GDP at the end of 2018. The latest government forecasts have debt topping 60% of GDP by 2024.

At this time, the seeds of economic recovery have been planted by Ramaphosa as he hopes to boost economic growth and household income levels. In his economic stimulus and recovery plan for the country, announced in Q3 2018, he hopes to rebuild confidence, end corruption and state capture, and restore good governance at state-owned enterprises. The positive GDP growth seen in Q3 2018 was a step in the right direction for the country, but risks remain as South Africa prepares for its national elections in May.

Sara B. Potter, CFA also contributed to this article