Your portfolio is not the same as gross domestic product

It was much worse than feared. South Africa’s economy contracted at double the rate expected by most economists in the first quarter. The -3.2% annualised decline in gross domestic product (GDP) from the fourth quarter means year-on-year growth was exactly zero. In real (after inflation) terms, the economy is no bigger than a year ago.

Read: Shock GDP figure undermines Ramaphosa’s reforms

Low inflation nation

In nominal terms, adding back inflation, growth was 4.1% from a year ago, implying that the economy’s inflation rate (for consumers and producers) was around 4%. Nominal growth was the slowest since 2009. Nominal growth matters because it reflects the rand growth in incomes and spending. (Real growth gives an idea of the increased purchasing power of those incomes.) The economy’s nominal wage bill only grew 4.4% year-on-year, for instance, and the private sector’s operating surplus (a proxy for company profits) grew by 3.4%.

Crucially, it means the government’s ability to generate tax revenue is much lower than thought.

National Treasury’s forecast for nominal growth for this year was over 7%. Things would have to improve a lot for that to be realised, or inflation would have to accelerate. Government’s borrowing metrics, the debt and deficit ratios are expressed relative to nominal GDP. A smaller denominator implies higher debt-to-GDP and deficit-to-GDP ratios. Economists are adjusting deficit ratios to 6% of GDP, while government’s debt ratio is likely to breach 60% sooner than expected. All this puts pressure on credit ratings.

Chart 1: Real and nominal year-on-year growth in GDP

Source: Stats SA

Lights out 

So what went wrong in the first quarter? Eskom is the main culprit. The Council for Scientific and Industrial Research estimated that the economy endured 770 gigawatt hours of load shedding in the first three months of the year, several times more than the whole of 2018 and half as much as the whole of 2015, the last time we…

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