2Q 2008 GDP a sharp but unsustainable rebound

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By Ettienne le Roux

Real GDP growth accelerated to 4.9% q/q annualised in 2Q 2008, from 2.1% in 1Q 2008. The sharp rebound in growth can largely be attributed to a recovery in mining and manufacturing output, which rose by 15.6% q/q and 14.5% respectively and contributed a combined 3.1 percentage points to overall GDP growth.

Widespread power outages, which began in the second week of January this year, caused major disruptions throughout the economy in 1Q 2008 but affected output in particularly the mining and manufacturing sectors severely. The subsequent return to a more stable electricity supply gave rise to the surge in output in both these sectors in 2Q 2008, but this is unlikely to be sustained and we expect considerable volatility in the quarter-on-quarter GDP numbers for the remainder of 2008.

Growth in the largest sector of the economy, the finance and business services sector, halved (in line with our expectations) from 4.9% q/q in 1Q 2008 to 2.3% in 2Q 2008. The slowdown is in keeping with the broad theme of weakening domestic expenditure and is also consistent with evidence of weaker demand for bank loans and the slump in real estate transactions.

Growth in the interest-rate-sensitive wholesale and retail trade sector contracted by 2.2% q/q. The slowdown in the sector was slightly more severe than we had anticipated but the continued moderation is in line with evidence of persistent weakness in sales of new vehicles and other durable goods, as well as the sharp decline in the FNB/BER Consumer Confidence Index in the first two quarters of the year.

The strongest performance, for the second consecutive quarter, came from agriculture, which accelerated to 19.6% q/q (up from 17.2% in 1Q 2008), contributing 0.5 percentage points to overall GDP growth. The sector has continued to benefit from high agricultural commodity prices and favourable weather conditions. Growth in the construction sector moderated in line with evidence of a slowdown in residential building activity but remained relatively strong at 10.6% y/y. Growth in both the transport and communication and personal services sector was surprisingly robust with both sectors expanding at around 4.0% q/q. At 1.1% q/q growth in government services was much lower than we had anticipated, but should rebound in 3Q 2008.

While the recovery of mining and manufacturing output, together with a strong performance from agriculture, has given rise to a strong GDP figure in 2Q 2008, we view the rebound as temporary. Growth in the largest sectors of the economy, finance and business services and wholesale/retail trade, continues to moderate and is indicative of persistent weakness in consumer demand. We maintain our forecast of average growth of 3.2% y/y for this year (2007 = 5.1%), and 2.8% in 2009.


Source: Ettienne le Roux, RMB Economics (via FNB), August 20, 2008.


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