South African Recession Blown Away

Discussion and Analysis by Charles Porter:

A recession in the South African economy has ended. This has been signalled by strong and positive annualised second quarter real GDP growth statistics. The growth performance of the South African economy surpassed expectations, resulting in an appreciation of the Rand, despite expectations already correctly forecasting the end of the recession.

The annualised estimate of growth in second quarter Gross Domestic Product (GDP) was released at 10:30 (BST) this morning. It boasted the end of a six-month recession, and exceeded market estimates. The figure, released by Statistics South Africa, was 2.50%. Despite signalling the end of, by definition, the shortest recession possible, the Rand experienced a sizeable boost against other major currencies, including the Euro and Dollar.

Against the Dollar, the Rand appreciated by a maximum differential in excess of 0.8%. The main driver behind the GDP growth acceleration was the agriculture, forestry and fishing industry, supplemented by finance, mining and utilities industries. Agricultural sector growth was facilitated by the end of a drought that had inhibited the South African agricultural community.

Interestingly, the industry incorporating agricultural, forestry and fisheries activity was comparably strong in the previous quarter, with mining quarter on quarter growth far greater in Q1 than Q2. Whilst the aggregate economy shrunk in Q1, the positive growth in Q2 represents a lack of inhibition from other sectors, namely trade, in conjunction with a lower initial output level.

Interestingly, the 2.5% growth figure still falls far short of the National Development Plan (2030) which highlights an imperative threshold of 5% growth on average, per annum. It is apparent that the market has not validated this figure as credible or realistic. However, the propensity for growth clearly exists, particularly within the mining and agriculture sectors. This makes the target a possibility, but by no means a certainty, at least within the short term.

The end of the statistics foreword may explain the limited extent of the Rand’s advance. The report ends with the admonition that whilst real Q2 growth is “impressive”, “longer-term indicators show subdued growth”. South Africa’s surprise interest rate cut in July, the first in five years for the economy, may change the fortunes of the economy’s growth. What will remain pivotal for the attainment of any growth target is the curtailment of high inflation.