GDP growth surprises in South Africa

• South Africa's real GDP growth rate surprised on the upside, accelerating to a 3.1% quarter-on-quarter seasonally adjusted annualized rate (SAAR) during the fourth quarter of 2017.
  
• Overall real GDP growth averaged 1.3% in 2017. Revised GDP numbers produced by the South Africa Statistical Service, StatsSA, now also show that South Africa avoided a recession during 2017.
  
• For 2018, IHS Markit expects real GDP growth to average 1.6%, with the risk tilted towards an upward growth surprise amid favorable policy adjustments, including a 50 basis point interest rate cut this year.
  
• The South African economy will also benefit from positive business and consumer sentiment following the election of Cyril Ramaphosa as the new leader of the African National Congress (ANC) and his subsequent inauguration as the president of the country. However, concrete business friendly economic policies will now be required to spur investment further along.
  
• We do not expect a downgrade of South Africa's local currency debt rating during March 2018 but the risk of a downgrade later in the year remains significant.
  

South Africa's real GDP growth rate accelerated at a 3.1% quarter-on-quarter SAAR during the fourth quarter of 2017, higher than the market consensus of 1.8% SAAR. This contributed to headline GDP growth of 1.3% in 2017 from 0.6% in 2016. Revised GDP numbers for the previous three quarters of 2017 produced by the South Africa Statistical Service, StatsSA, now also show that South Africa avoided a recession during 2017.

Agricultural sector props up growth during 2017

Primary sector GDP increased by 4.9% SAAR during 2017 Q4: a double digit rebound in agricultural production mitigated a downturn in output in the mining sector during the fourth quarter. Secondary sector economic activity rose by 3.1% SAAR: both the manufacturing and water and electricity sub-sectors recorded strong growth while the growth rate in the construction sector weakened reflecting dismal residential and non-residential building activity. Tertiary sector GDP growth averaged 2.7% SAAR in 2017 Q4: sectors showing the largest contribution to the tertiary sector's growth performance included wholesale and retail trade sales and the financial sector. Weaker growth of between 0.1%-0.2% SAAR was recorded in the transport and communications, government services and personal services sub-sectors.

Outlook and implications

The fourth quarter growth surprise combined with significant upward revisions in South Africa's growth performance in the preceding three quarters left headline real GDP growth at 1.3% for 2017 - higher than our expectation of 0.9%. IHS Markit draws comfort from the relatively broad-based economic resilience witnessed during Q4. At the same time, we acknowledge that some one-off factors contributed to the strong economic performance. Of these, the rebound in agricultural activity, "Black Friday" retail sales and fixed capital formation in machinery and equipment are most probably the most prominent.

For 2018, IHS Markit expects real GDP growth to average 1.6%, with the risk tilted towards an upward growth surprise. We expect household spending to hold up in 2018, on the back of real income gains and a possible 50 basis points cut in the South African Reserve Bank's (SARB) policy rate. However, the higher effective tax burden following the 1% hike in the Value Added Tax (VAT) rate and limited provision for "bracket creep" adjustments in the 2018/2019 fiscal budget could leave residential building activity muted.

Positive business and consumer sentiment following the election of Cyril Ramaphosa as the new leader of the African National Congress (ANC) was soon followed by his inauguration as the president of the country. Concrete business friendly economic policies will now be required to spur investment further along. Uncertainty over the expropriation of land without compensation, incomplete revisions to mining legislation and an uncertain future direction in State Owned Entities (SOEs) remain a source of concern.

A consistent turn towards 'populist government spending' without high yielding economic returns, which could ultimately improve South Africa's growth performance over the longer term, could still easily trigger a downgrade by Moody's of South Africa's local currency debt rating to sub-investment status, if not in March 2018, later in the year. The severe drought in the Western Cape Province combined with late rains and fewer hectares of land planted in the rest of the country, leaves the probability of slowing agricultural output in 2018 as highly likely.

A stronger rand poses inflation and interest rate support but this is counterbalanced by weaker export resilience (despite a stronger global environment), while import demand could pick up due to the rand strength. IHS Markit therefore maintains its 2018 GDP growth outlook for South Africa, but acknowledges that GDP growth could surprise on the upside assuming favorable policy changes. We do not expect a downgrade of South Africa's local currency debt rating during March 2018 but the risk of a downgrade later in the year by Moody's remains significant.