Investment in South Africa remains subdued amid signs of economic recovery

South Africa has recovered from its recession, though investors remain cautious given policy uncertainties and waning business sentiment.

South Africa 29-09-2017 dot

The country’s real GDP expanded by 2.5% quarter-on-quarter (q-o-q) in the three months to June, according to Statistics South Africa (Stats SA), moving the country out of recession after its latest contraction – the second in eight years.

Growth was driven by a rebound in the agriculture sector, where output expanded 33.6% q-o-q due to better weather conditions, adding 0.7 percentage points to GDP. Output was also supported by stronger activity in finance, real estate and business services, which together grew 2.5% q-o-q and contributed half a percentage point to GDP.

Results in these sectors helped South Africa’s economy to register year-on-year growth of 1.1% that quarter, Stats SA reported.

Contraction in investment, gross fixed capital formation

While the broader economy showed signs of recovery, one key indicator – capital investment – moved the other way, softening by 2.6% q-o-q.

This decline is part of a broader trend; gross fixed capital formation (GFCF) fell in all but three of the preceding eight quarters. The drop in the second quarter reverses six months of modest growth, with GFCF rising by 1.7% and 1.3% q-o-q, respectively, in the previous two quarters.

Much of the decline stemmed from a downturn in residential construction, where activity fell by 13%, contracting overall GFCF by 1.3 percentage points.

The only positive input to GFCF was in the machinery and equipment segment, which contributed 0.9 percentage points to GFCF growth – a possible sign of an improved outlook for manufacturing and industry, though this could take time to have a impact on GDP and production figures.

Local companies cautious on new capital expenditure

Investors may look for more positive data in the coming months before committing to new capital expenditure.

While the cost of capital is relatively low thanks to interest rate cuts, and many large corporations have robust balance sheets, there is little inclination to invest at present, according to Kevin Lings, chief economist of local capital markets firm Stanlib.

“This suggests that many businesses are essentially ‘treading water’, waiting for economic and policy conditions to improve on a sustainable basis before committing their limited capital to capacity building,” Lings told local media earlier this month.

This view was supported by data from the South African Chamber of Commerce and Industry, whose monthly business confidence index dropped from 95.3 in July to 89.6 in August, the lowest level since the mid-1980s.

Another survey, conducted by Rand Merchant Bank and the Bureau for Economic Research, found that overall business sentiment had made a modest improvement in the third quarter. However, as almost 70% of executives polled were unsatisfied with business conditions, this suggests any recovery in the South African economy could be muted this year, in part due to weak capital investment growth.

“In fact, the more likely scenario is one where GDP growth remains stuck at around 1% over the short to medium term, hamstrung by lacklustre private sector fixed investment and jobs growth,” the report noted.

Policy uncertainties impact investment

Among the main reasons both reports cited for the slow pace of investment is uncertainty over the direction of government policy and the pace of regulatory reforms.

The convening of the African National Congress in December should bring greater clarity, when the successor to President Jacob Zuma as party leader will be named.

Combined with further positive growth in the third quarter and beyond, a clearer picture of political direction in the medium term could encourage more capital expenditure, in turn stimulating higher levels of economic activity.

Reprinted with permission from OBG.

This information was originally published by Oxford Business Group (OBG), the global research and consultancy firm.  For economic news about South Africa and other countries covered by OBG, please visit http://www.oxfordbusinessgroup.com/economic-news-updates

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