GDP Data Shows the Economy Expanded Further in 2Q21

  • Market Overview

GDP data shows the economy expanded further in 2Q21

As expected, today's GDP release revealed the material forecast risk that we highlighted in our weekly report. Preliminary GDP growth for 2Q21 marginally surprised to the upside, coming in at 1.2% q/q (from 1.0% q/q in 1Q21) compared with both our and consensus expectations of 0.9% q/q. The forecast for 2Q21 was tricky as the revised GDP from the latest 2015 benchmarking cycle did not have 1Q21 GDP actual figures, unlike with the previous GDP data set. Real GDP (not seasonally adjusted) grew by 19.3% y/y (versus our 18.5% y/y and consensus’s 17.8% y/y estimate), reflecting last year's lower base when the real GDP level sharply declined by R191.8 billion y/y in 2Q20 due to the large-scale lockdown measures that the government implemented to curb the spread of the coronavirus. The level of real GDP is still down by 0.7% compared to the non-pandemic 2Q19 level, reflecting continued and entrenched economic slack.

The upside surprise from the 2Q21 quarterly growth out-turn was primarily driven by a more robust growth performance of 6.9% q/q in the transport sector, 2.5% q/q in the personal services sector and 6.2% q/q in the agricultural sector. Growth in the transport sector was due to increased economic activity for land transport and communications services, while agriculture benefited from increased production of field crop, horticulture and animal products. As expected, the manufacturing sector contracted by 0.8% q/q (Figure 1), which Stats SA attributed to a larger contraction in the petroleum, chemicals, rubber and plastic products division. Financial intermediation, insurance, real estate and business services (FREBS) contracted by 0.4% q/q, shaving off 0.1 percentage point from GDP growth.

Overall, compared to pre-pandemic 4Q19 levels, robust performance in the agricultural sector’s activity has persisted – assisted by favourable demand and weather conditions, while activity in the FREBS sector has moved sideways. Other sectors have also persistently crawled out of a pandemic-induced slump, and their respective activities are gradually gravitating towards the pre-pandemic 1Q20 levels. However, the construction sector is still lagging behind in the ongoing recovery, which is reflected by the stagnant growth in gross fixed capital formation (GFCF).

Official headline GDP Growth

Demand-side GDP components

Real GDP still below 2Q19 levels

More Resillience in the agricultural sector while construction is

As measured from the expenditure side, growth of 1.2% q/q was led by real export growth of 4.0% q/q while real imports only grew by 0.4% q/q. Private household consumption expenditure (HCE) grew by 0.5% q/q, contributing 0.3 percentage point to GDP. On a year-on-year basis HCE grew strongly by 22.7%. This reflected compensation of employees (labour income) growth of 3.4% q/q (14.1% y/y). The release of the SARB Quarterly Bulletin later this month will give us more details about the performance of non-labour income (i.e. investment income). Within HCE, growth was driven by durable goods expenditure, which grew by 2.6% q/q (51.7% y/y); followed by non-durables, which grew by 0.8% q/q (19.9% y/y); and semi-durables with growth of 0.5% q/q (63.9% y/y). Services expenditure contracted by 0.1% q/q, but posted growth of 15.3% y/y.

Government consumption expenditure contracted by 0.1% q/q and 0.1% y/y, while real GFCF grew by 0.9% q/q and 16.1% y/y. GFCF growth was driven by private business enterprises GFCF, which grew by 3.3% q/q (23.8% y/y), while public corporations GFCF declined sharply by 6.7% q/q (but grew 17.0% y/y) and government GFCF contracted by 3.5% q/q and by 7.9% y/y. Change in inventories amounted to -R21.7 billion in 2Q21 compared to -R13.5 billion in 1Q21, reflecting further destocking and specifically large drawdowns by electricity and mining sectors. Restocking is likely to be challenging due to the global shortage of raw materials and elevated shipping costs.

At R6.2 trillion, nominal GDP reflected an increase of 4.3% q/q and the GDP deflator index grew by 3.1% q/q (7.5% y/y), reflecting elevated terms of trade from higher commodity prices.

Outlook: fragile economic recovery amid pandemic uncertainty

Our current growth forecast of 4.1%, 2.2% and 1.4% over 2021 to 2023 marks a protracted economic recovery with real GDP only expected to reach the pre-pandemic 2019 level in 2023. We are concerned about the uncertainty around the coronavirus, which will keep mutating while vaccine hesitancy is prevalent. The global shortage of raw materials (including semiconductors), inefficiencies at ports and elevated shipping costs remain significant concerns. Quarterly growth is likely to be very poor in 3Q21 amid the July social unrest and level 4 lockdown restrictions. Beyond the pandemic uncertainty, a sustainably higher growth path for South Africa will be a critical function of accelerated concrete economic reforms. Clear indications of broad-based private sector fixed investment (and employment) are required before a more significant step-change in the medium-term growth outlook could be pencilled in. We expect modest employment growth to lag behind the ongoing economic recovery. This is corroborated by the recent disappointing employment figure for 2Q21, where formal (non-agricultural) employment declined by 375 000 q/q.

Implications for monetary policy

This data does not change our current outlook for monetary policy. We still expect the SARB to keep its policy rate steady at 3.50% in the upcoming September Monetary Policy Committee (MPC) meeting. Still, we pencil in the first 25bps hike at the November 2021 meeting as we see the MPC gradually building up its policy space. The consensus is for the policy rate to remain steady at 3.50% throughout this year. We acknowledge the significant risk around predicting the first hike in the context of a continued domestic economic (and labour market) slack and an imminent, but likely moderate, tightening of global monetary policy conditions.

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