Economic growth improves in the 2nd quarter, but not enough to prevent consumer confidence weakness

Gross Domestic Product for the 2nd Quarter of 2016 showed some mild improvement, returning to positive growth after a 1st Quarter contraction. But more will be required if near term job loss is to be prevented.

StatsSA GDP (Gross Domestic Product) numbers for the 2nd quarter of 2016 painted a slightly improved, but still weak, growth picture. From a contraction (“negative growth”) in the 1st quarter of -1.2% on a quarter-on-quarter annualized basis, a positive growth rate of +3.3% was recorded in the 2nd quarter. However, this translates to a still-slow year-on-year growth rate of 0.6%, compared with a -0.1% contraction in the 1st quarter.

The best performing sectors, on a seasonally adjusted quarter-on-quarter annualized growth basis, were Mining (11.8%) and Manufacturing (8.1%) Gross Value Added (GVA), with Finance, Real Estate and Business Services a distant 3rd with 2.9% growth.

The worst performing sectors were Electricity, Gas and Water, with a -1.8% contraction, and Agriculture with a -0.8% contraction.

Further employment decline still likely, however

However, 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.

The result has 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.

Back in the late-1990s, when the Wage Bill/GDP Ratio peaked at above 54%, that period was characterized by what we termed “jobless growth” at the time. The economic growth “boom” years in the 1st half of last decade saw a very significant decline in the Wage Bill/GDP Ratio (as a result of strong GDP growth), and only then did we experience a period of reasonably solid Formal Sector Employment growth from around 2003-2008.

Since 2009, however, the combination of a lack of economic growth and steadily rising Labour Cost-GDP Ratio has once again laid the foundation for “labour shedding”, with the 4-quarter moving average in the Wage Bill/GDP Ratio back on the high side at 53%. The 2nd quarter is a seasonally low Wage Bill/GDP Month, but at 52.77% this ratio was mildly up again on the 2nd quarter of a year ago.

And indeed, examining recent years’ SARB Non-Agriculture Formal Sector Employment Indices, the private sector has shown a decline in employment for 3 consecutive years from 2013 to 2015, while the financially constrained Public Sector began to show employment decline in 2015 too.

But these declines have not yet been sufficient to reverse the rising trend of the Employee Remuneration (Wage Bill)/GDP Ratio yet, which would suggest that, given little prospect for economic growth, more labour shedding may well take place in the near term.

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 3 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.

A more cautious Consumer still expected to emerge

Given an expected environment of labour shedding and weak consumer confidence, FNB expects an increasingly cautious Household, which will be focused on lowering its Debt-to-Disposable Income Ratio further, as well as lifting the savings rate noticeably.

This is arguably the appropriate response from households as the country’s economy moves deeper into its “super-cycle stagnation” phase. But while the Household Sector is busy making the adjustment towards significantly greater financial “conservatism”, it could be a drag on already weak economic growth.

In the 2nd quarter Expenditure Side GDP figures, Real Household Consumption Expenditure growth probably benefited from some faster economic growth-driven Real Disposable Income growth acceleration, accelerating to a 1% quarter-on-quarter annualized growth rate. This is stronger than the previous quarter, but below the 3.3% annualized GDP growth.

FNB would expect to see Consumption Expenditure growth under performing GDP growth more frequently in future as consumer “conservatism” increases and the savings rate improves gradually.

The stronger consumer spend in quarter 2 appears to be mildly reflected in the GVA growth of the Retail and Wholesale Trade, Catering and Accommodation Sector, which showed a very small acceleration on a
quarter-on-quarter annualized basis from 1.3% previous to 1.4%.

Early 3rd Quarter signs aren’t yet encouraging for the Household Sector/Consumer

Although the 2nd quarter GDP stats showed an improvement after the 1st quarter’s contraction, early signs don’t yet point to this improvement continuing into the 3rd quarter. It is admittedly early days, but the 2 most up to date leading business cycle indicators, namely New Passenger Vehicle Sales and the New Manufacturing Orders component of the Manufacturing Purchasing Managers’ Index (PMI), have both to date pointed to a weaker 3rd quarter

After an average year-on-year decline of -12.9% in the 2nd quarter, New Passenger Vehicle Sales declined more sharply to the tune of -16.8% for the 1st 2 months of the 3rd Quarter. The PMI New Sales Orders Index, also included in the SARB’s Composite Leading Business Cycle Indicator, averaged 54.8 (Scale of 0 to 100) in the 2nd quarter before dropping to 48.5 average for the 1st 2 months of the 3rd quarter.

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 3 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.

Read more here: Property_Barometer_ Q2_2016_GDP_Sep_2016