The South African economy, if measured from the expenditure side, swung from a 1.6% quarter-on-quarter (q/q) seasonally adjusted annualized (saa) expansion in the fourth quarter 2018 to a 3.4% q/q saa contraction in the first quarter 2019, but if the volatile change in inventories and foreign trade sectors are excluded, then final domestic demand only swung from a 1.6% expansion to a 1.1% contraction.

Although inventories were once again depleted in the first quarter as the production side could not produce enough due to electricity load shedding in February and March, the decline was not as great as in the fourth quarter when there had been a surge in exports.

The constrained ability to produce meant that the goods producing sectors such as agriculture, mining, manufacturing and construction all suffered quarterly contractions and that had a spillover effect into the trade, transport and electricity sectors.

The only sectors that showed a quarterly increase in the first quarter were government services, personal services and financial services.

In the fourth quarter, exports surged by 11.1% on the same basis, while imports plunged by 16.0%.

This meant that net exports added 8.7 percentage points to GDP growth, offsetting the 8.7 percentage points decline caused by a massive drawdown in inventories as domestic producers were unable to meet external demand.

In the first quarter, exports plunged by 26.4% q/q saa, while imports slipped by 4.8% q/q saa. This meant that net exports subtracted 7.5 percentage points from GDP growth, which was not offset by the 5.3 percentage point addition caused by a smaller drawdown of inventories.

The fourth quarter inventory drawdown was the largest for quarterly data going back to 2010. The previous largest drawdown was in the second quarter 2016 when the constant 2010 rand reduction was R37.4 billion.

The inventory drawdowns lead to wild swings in gross domestic expenditure.

In the second quarter 2016 the drop was 4.1 per cent followed by a 5.7 per cent increase the subsequent quarter as inventories are replenished. In the fourth quarter 2018 gross domestic expenditure plummeted by 6.8%, so one should an increase of similar magnitude in the first quarter 2019 and in the event it came in at 4.3%.

Economists and policy makers however react to the headline GDP data, not the domestic demand number, which is seldom reported in the media.

That means that the odds of a repo rate cut in July has risen substantially after two members of the South African Reserve Bank’s Monetary Policy Committee voted for a 25 basis point cut at the last meeting in May. The other three members voted to keep the repo rate steady.

At the time, South African Reserve Bank Governor Lesetja Kganyago downgraded the SARB’s forecast of GDP growth in 2019 to 1.0% from 1.3% forecast in March. This was in response to a “larger than expected slowdown in the first quarter, weak business and consumer confidence as well as growing pressure on household disposable income.”

The last time the key South African interest rate changed was in November 2018, when it was hiked to 6.75% from 6.50% on a three-to-three vote split with Kganyago breaking the deadlock.

The implied path forecast by the SARB’s econometric model in May was for one 25 basis point cut by the end of the first quarter next year.

First National Bank chief economist Mamello Matikinca-Ngwenya expected a 25 basis points cut in July given the weakness in the economy, which has failed to grow over the past year.

“Today’s disappointing GDP print reaffirms our view of easier monetary policy. Given the significantly weak growth outcome relative to the SARB’s expectation and benign inflation outlook we expect the SARB to cut the repo rate by 25 basis points at the next MPC meeting,” she said.

Mike Schussler from economists.co.za said the MPC was unlikely to cut in July as it could lead to a credit ratings downgrade.

“They are going to get real worried about ratings now. They can’t cut so the stink is going to get bigger. Even if they cut it will not help much. We need more than a rate cut. We need an economic revival on par with what China did in the early 1980’s,” he said.

Sanlam Investment economist Arthur Kamp said a rate cut was possible in either July or September provided the rand remained stable and inflation expectations did not deteriorate.

“If the above conditions are met and if the SARB shares my concern that real GDP growth is likely to average something similar to last year’s weak outcome, then I think there is a robust case for a rate cut,” he said.

Helmo Preuss in Makhanda (formerly Grahamstown), South Africa for The BRICS Post