South Africa out of recession… where to from here?

by , 06 December 2018
South Africa out of recession… where to from here?
At 11:30 on 4 December 2018 Stats SA announced that South Africa is out of its recession.

GDP Growth for the third quarter came in at 2.2%, after a 2.6% decline in the first quarter and a 0.4% decline in the second quarter of 2018.

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South Africa out of recession… where to from here?

By Francois Joubert, Managing Editor, Red Hot Penny Shares 
Wednesday, 5 December 2018
Economist surveys pointed to expectations of anywhere between 0.8% and 2.5% growth for the quarter. The average expectation I had my eyes on was 1.8%.

So, the 2.2% quarterly growth is a positive. But it still doesn’t erase the declines of the first half of 2018.

 

 

So, what caused this economic recovery?
 

Agriculture grew by 6.5% and manufacturing expanded 7.5% - and on the back of these figures our economy grew. 

The finance sector grew 2.3% and transport grew a whopping 5.7%.

The only real drag on economic growth was the mining sector which declined by 8.8%.

Platinum mines specifically are really struggling with low prices, low productivity and issues like safety stoppages and strikes.

I expect a number of platinum mines to close down in 2019 – but there will also be new, low cost production coming online at the same time.

The mining sector however will continue to struggle as high wages, tough labour laws and ageing infrastructure catch up to them.

Mining companies haven’t invested in new mines, even though the resources are there, because of uncertainty regarding mining legislation and licensing procedures.

This however should be addressed in the coming year – which gives me some hope for positivity in the sector.

 

Economic growth is positive – but still too slow
 

Quarterly growth of 2.2% was great – but considering the first half of the year our growth for 2018 will still be quite slow.

We’ll likely need 3% or more growth in the fourth quarter of 2018 just to hit the Reserve Bank’s target of 0.8% for the year.

We need economic growth of 3% or more for South Africans to be better off and circumstances to change for the poorest of the poor.

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On the upside - lower fuel price could add GDP growth and curb inflation
 

In the meantime the oil price has crashed as worldwide production continues increasing (specifically in the US and Russia).

This is great for SA.

The R1.84 drop in the fuel price for December could add 1% economic growth to South Africa in 2019.

At the same time, it will see inflation significantly lower. October saw inflation hit 5.1%, and the November figure will probably be even higher due to the high fuel price increases we saw back then.

But this drop in the fuel price will definitely lower inflation.

And the great thing is, lower inflation = lower interest rates.

Lower interest rates in turn will help consumers buy more as their disposable income will be higher. This is good, because at its last sitting the SARB raised interest rates because of inflation risks.

But lower oil, and a stronger rand means lower inflation. I believe this will put a stopper ahead of the SARB’s interest rate hiking plans.

 

Other economic indicators showing further economic recovery
 

South African retail sales rose 0.7 percent year-on-year in September after increasing by 2.5 percent in August.

This supports third quarter GDP growth – and a rise out of the recession.

And according to the National Association of Automobile

Manufacturers of South Africa (NAAMSA) “November export vehicle sales had turned in another positive performance and at 34 352 vehicles had registered an improvement of 824 units or a modest gain of 2.5% compared to the 33 528 vehicles exported in October last year.”

Simply put – things are slowly turning up. Our economy is looking better. Corruption is being addressed by the Ramaphosa administration.

There’s reason for optimism.

So while our economy will recover and things are getting more positive – there will still be ‘potholes’ looming in the future which you will have to navigate as an investor…

 

Where should you invest to make the most of this looming recovery?
 

I would stay clear of the construction industry and be very selective with mining companies. Small and BEE empowered miners are safe – but the big ones without the right credentials will continue to attract government meddling.

Then I am very excited about
 IT, transport, alternative energyand recycling companies for 2019.

There is a clear trend of consumers spending more on online sales (2018 growth was more than 25% with online sales hitting R14 billion). That means opportunities for IT companies, payment portals, courier companies and the like.

And then as people become more aware of environmental issues, and
 Eskom loadshedding, solar and wind power will continue to thrive…

And companies that
 recycle metals, garbage and even produce electricity from garbage will get more opportunities in 2019.
 

Here’s to unleashing real value,

Francois Joubert,

Red Hot Penny Shares Editor

 


 


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