PRETORIA – South Africa‘s economy grew by its most in six quarters as the mining and manufacturing sectors reversed sharp contractions due to an uptick in exports, the statistics agency said, ending fears of a recession.

Growth beat market consensus, rising by 3.3% in the second quarter of 2016, its fastest quarterly growth since the fourth quarter of 2014, after shrinking by 1.2% in the three months to March, Statistics South Africa said on Tuesday.

The currency of Africa‘s most industrialised economy extended its gains to 1.3% after the growth data was released. The rand traded 2.76% higher at 13.9967 by 23:40 versus overnight close of 14.3800.

Economists polled by Reuters had expected a quarter-on-quarter GDP expansion of 2.3% while the economy was seen expanding 0.5% year-on-year.

At market prices Q2’16 Q1’16 GDP q/q* 3.3 -1.2 GDP y/y** 0.6 -0.1

* Seasonally adjusted and annualised pct changes

** Unadjusted

Mining led the growth, expanding by 11.8% after an 18.1 contraction in the first quarter.

Manufacturing also grew, up 8.1% quarter on quarter from 0.6% previously.

“The mining and manufacturing were your key drivers for the 3.3 (percent growth) mainly related to exports of platinum and exportation of motor vehicles,” said chief director for national accounts at Stats SA Michael Manamela.

Q/Q seasonally adjusted, annualised change by sector Q2’16 Q1’16 Agriculture -0.8 -6.5 Mining and quarrying 11.8 -18.1 Manufacturing 8.1 0.6 Electricity, gas & water -1.8 -2.8 Construction 0.1 0.4 Wholesale, retail 1.4 1.3 Transport, comms 2.9 -2.7 Finance, real estate 2.9 1.9 General govt. service 1.2 1.1 Personal services 0.8 0.5

On a year-on-year basis, the economy grew 0.6% versus a 0.1% contraction in the first quarter, the agency said.

The agency however warned that the jump in quarterly growth was also due to the sharp contraction in the previous quarter, and the more realistic measure was to look at the first six months of 2016, which showed growth at 0.3%.

“You should see it in context of that it compares with a very low first growth,” Manamela said.

Expenditure

The country’s real gross domestic expenditure grew by 3.4% in the second quarter of 2016 after contracting by a revised 1.2% in the first quarter, the statistics agency said on Tuesday.

Household expenditure increased by 1% in the second three months of the year after decreasing by 1.7% in the first quarter.

Government expenditure was up, increasing by 1.3% in the quarter compared to a 1.2% increase in the first three months of the year.

In a statement on Tuesday, FNB’s John Loos said “it appears unlikely that this small uptick in GDP growth will be sufficient to prevent further job loss in the near term. More growth strengthening would be required for that.

“Total Domestic Wage Bill growth was estimated at 8.01% year-on-year in the 2nd quarter. This growth has been running ahead of Nominal GDP growth for some time, and did so again in the 2nd quarter.”

He added that there’s been a steady rise in the Wage Bill-GDP (At Factor Cost) Ratio, “meaning that labour costs have increasingly been ‘crowding out’ the country’s Gross Operating Surplus (GOS), making the achievement of profitability that much more challenging.”

“A period of greater job and income insecurity approaching, in turn, is expected to keep Consumer Confidence at very weak levels, where it has been for the past three years or so. This is likely to imply a period where Household Consumption Expenditure growth will not be a major driver of economic growth from the expenditure side,” said Loos.

Comment

In a flash comment, Nedbank’s Economic Unit said: “The outlook remains murky. On the output side, the prospects for agriculture are uncertain, heavily reliant on good rains in the upcoming summer. Some improvement off a low base is likely in mining and manufacturing even though the upside will still be contained by patchy global demand, relatively low global commodity prices, rising domestic production costs and limited economic infrastructure.

“On the expenditure side, restructuring will probably continue in the private sector given the global dynamics and domestic uncertainties, limiting fixed investment and job creation.Consequently, household confidence and spending are likely to remain subdued, hurt by the strain on disposable income, relatively high debt service costs, a stagnant job market and persistent political turmoil. Government has no room for manoeuvre either, given the need to reduce the budget deficit and contain the rise in government debt.

“On balance, the economy is likely to grow by about 0.2% in 2016, before expanding modestly by around 1% in 2017,” said the bank’s unit.

It added that while the Q2 improvement was foreseen, few see this pace being sustained over the next year to 18 months.

In a statement, KPMG senior economist Christie Viljoen added: “The South African Reserve Bank (Sarb) said during July that it expects 0% growth in the South African economy during 2016 while the International Monetary Fund (IMF) commented during the same month that it projects a mere 0.1% growth for the calendar year. The outlook for the second half of this year is therefore far from optimistic, and avoiding a sovereign ratings downgrade in December is certainly not guaranteed.”

Loos said: “In our own residential property market-related FNB House Price Index, whose seasonally adjusted month-on-month fluctuations can often broadly track short term economic fluctuations reasonably well, we have seen three consecutive months of growth slowing to August, after a 2016 high point reached in May. The housing market can often say a lot about the economic direction.

“To date, therefore, some of the key up to date leading indicators don’t yet provide meaningful encouragement to the Household Sector in the form of any convincing signs of the 2nd quarter growth recovery being sustained.”

As to Sarb movements, Nedbank said: “The bigger question for the Reserve Bank is whether the highly vulnerable rand will be able to withstand changes in investor sentiment likely to flow from the persistent threat to National Treasury, the general deterioration in the political landscape, the risk of further sovereign risk rating downgrades come December and possible unexpected changes in US monetary policy.

“We expect the Reserve Bank to err on the side of caution. For now we anticipate one more hike of 25 basis points in January 2017,” states Nedbank’s Economic Unit.

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