Nedbank: Gross Domestic Product

29 Nov.

Nedbank Economic Commentary: Gross Domestic Product – Q3 2011.

Real gdp growth remained subdued in the third quarter.

• Real gdp growth disappointed in the third quarter, growing at a subdued annualised pace of only 1,4 % q-o-q, up slightly from 1,3 % in the second quarter, but below market expectations of a 1,8 % increase.
• The downward pressure mainly came from lower agriculture, mining and manufacturing production. In contrast, activity in the services sectors was generally stronger than expected, supported by strong consumer spending and increased trade on the financial markets.
• Economic activity is likely to improve slightly in the final quarter. The domestic trade and services industries will provide the momentum, underpinned by a relatively resilient consumer. Trading conditions in the mining and manufacturing sectors will probably remain difficult, but production and exports are likely to fare better off the low base established in the middle of the year. We still expect real gdp growth of around 3,1 % in 2011 as whole. The outlook for 2012 is becoming cloudy as troubles in the Eurozone intensify and the US recovery continues to loose momentum. At this stage, we expect gdp to grow by just over 3 % in 2012, with the risk residing firmly on the downside.
• The market and the Reserve Bank largely anticipated subdued growth for the third quarter. While the figures will not surprise, they will also not provide comfort. Added to this, the Reserve Bank will be concerned about the growth outlook for 2012, which seems increasingly fragile, especially as the risk of a chaotic outcome to Europe’s sovereign debt crisis increases. At the same time, inflation is rising, reaching the upper 6 % limit of the Reserve Bank’s target range last month. However, inflation remained confined to rising food and fuel prices as well as higher administrative costs, with little sign of secondary inflationary pressures. The downside risks to economic growth are therefore expected to set the tone at the next few Monetary Policy Committee (MPC) meetings.Consequently, we still expect the MPC to keep interest rates on hold until the second half of 2012. If recession threatens, the MPC may opt to cut rates over the short term or keep rates unchanged for even longer.

Comment

Real gdp growth disappointed in the third quarter, growing at a subdued annualised pace of only 1,4% q-o-q, up slightly from 1,3% in the second quarter, but below market expectations of a 1,8% q-o-q increase. As expected, the weakness mainly came from the production side of the economy. Real value added in the agriculture, mining and manufacturing sectors contracted over the quarter. In contrast, activity in the services sectors was generally stronger than expected, supported by resilient consumer spending.

In the manufacturing sector, real value added dropped by a further 1,9% q-o-q, mainly due to strike action in the metals and petroleum industries in July, outages at key steel furnaces and weaker exports. Lower production was recorded in the following broad groupings of industries, ’basic iron and steel, non-ferrous metal products and machinery’, ‘petroleum, chemical products, rubber and plastic products’ as well as ‘furniture and other manufacturing’. In the mining sector, real value added contracted by a sharp 17,4% over the quarter. The weakness was broad-based, with all major mining industries recording lower production. Agricultural production fell for the third consecutive quarter, contracting by 4,3%.

In contrast, the services sector remained relatively robust, with growth rates accelerating in some of the large industries. Real value added by the broader wholesale, retail, motor trade and accommodation industries rose by an impressive 6,1% over the quarter, boosted by strong consumer spending. Real value added by the finance and real estate industries also grew at a faster pace of 4,5%, but the acceleration was mainly due to increased trading activity on the financial markets. In contrast, conditions in the banking and real estate industries remained weak despite 37-year low interest rates and softer house prices.

Encouragingly, construction activity picked up slightly, growing by 1,8% over the quarter. Although activity remains at weak levels, the improvement reflects a moderate increase in capital expenditure by the private sector and some progress in the roll out of public sector infrastructure and other capital expenditure projects.

Generally subdued economic activity, especially the weakness in the mining and manufacturing sectors, contained demand for electricity and transport services. Consequently, real value added by the power and water industries fell by 2,6%, while growth in real value added by the transport and communications industries slowed to just over 2% after growing at a rate of just over 4% in the preceding two quarters.

General government services and personal services remained relatively firm, although the growth rates in real value added in both industries moderated over the quarter. …

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