The latest release from StatsSA showed that South Africa's economy grew 3.1% for the second quarter of 2019.
This was better than the 2.5% expected by most economists, and it's a good sign for South African's who were worried about recession hitting.
Unfortunately, this growth doesn't necessarily mean our economy is growing again…
With first quarter GDP shrinking 3.2%, 3.1% growth doesn't mean that much.
In fact, for our economy to grow 1% in total for the year we'd have to see 2% growth in both quarters still remaining.
So here’s what to expect for the remainder of 2019
South Africa is stuck in a low-growth rut. If our economy grows by 2% for each of the last two quarters of 2019 overall growth for 2019 will come in at 1% - which is lower than what was expected at the start of 2019.
If the last two quarters hit 0% growth, the SA economy would be up by around 0.3% for the year.
Estimates by the SA Reserve Bank expect growth at 0.6% for the full year.
That’s around half of the World Bank estimate of 1.2%, but most likely the more accurate figure.
So why isn’t SA’s economy returning back to growth?
Simply put there’s not enough confidence from consumers and business.
According to the SA Chamber of Commerce and Industry SA business confidence is as its lowest levels since 1985.
That means private companies and individual investors are holding back money which could have been invested in the economy creating jobs.
Only after a couple of quarters of investment growth would the SA economy be able to return to sustainable growth.
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There is hope on the horizon for economic recovery
In April 2018 Energy Minister, Jeff Radebe, signed a R56 billion contract for independent power producers which will add 2,300 MW to the SA grid.
As we speak these projects are entering construction phase.
And that means significant capital being invested in the SA economy.
And it shows in the numbers.
For each quarter since the start of 2018 the ‘Gross Fixed Capital Formation’ indicator has been trending down. The second quarter of 2019 showed the FIRST quarter of growth since then.
(Source: StatsSA, BusinessInsider)
This means that companies are again investing in machinery and equipment.
The investment from the independent power producers should carry over for at least the next two quarters. But by then business confidence will have to have improved enough to get other sectors of the economy investing again.
Private companies typically do not invest if there is low business confidence. What we’ll have to see is a couple of quarters of investment growth to see it as a sign that the economy is improving.
What will create the business confidence needed for companies to start investing in SA again?
Well, a tough stance on out of control crime and looting would be a start. Then some policy certainty for mining companies. And lastly, property rights should be protected.
Until then, we remain in limbo.
Here’s to unleashing real value,
Editor, Red Hot Penny Shares