South Africa’s first quarter gross domestic product (GDP) real growth came in ahead of expectations – an annualised 4.6 per cent, after a revised 5.8 per cent increase in the fourth quarter of 2020. Agriculture, mining, manufacturing, trade and non-financial services have recovered to around their 2020 Q1 levels.
For the rest of 2021, economy recovery should also surprise on the upside, though there will be some curtailment of activity while the COVID-19 third wave runs its course.
There are several dynamics at play. One is the buoyancy in global commodity markets – mining has recovered by 5 per cent in constant prices and 12 per cent year-on-year in nominal terms. A second boost will come from agriculture, benefiting from both export demand and favourable production conditions. Thirdly, construction and building have seen improved confidence levels this year, after four years of decline. Fourthly, there is a recovery due in private sector credit extension, after more than a decade of deleveraging.
The quarterly change in inventories is a key indicator, both of the impact of lockdown in 2020, and of the recovery path ahead.
The national accounts have now recorded six consecutive quarters of inventory destocking, including an extraordinary R107 billion in the second half of 2020, equivalent to over 4 per cent of GDP.
Over two-thirds of the reduction in inventory stocks in 2020 was recorded by the mining sector. This goes a long way to explaining how mining sales and revenue remained so strong despite lengthy production stoppages or slowdowns. But there were also substantial stock reductions in manufacturing and in retail and wholesale trade.
Both in the form of lower imports of intermediate and finished goods, and in exports of accumulated output, changes in inventories contribute positively to the current account of the balance of payments.
Reductions in inventories also lower the working capital requirements of businesses, contributing to the corporate sector’s net financing surplus and the intermediation through which government’s 2020 borrowing requirement was met.
The trend in industrial and commercial inventories is a useful indicator of leads and lags in the business cycle.
There is a long secular decline in the inventory ratio – as an annual percentage of non-agricultural GDP, industrial and commercial inventories have fallen almost continuously since 2007, from 15.8 per cent to 9.5 per cent in 2020. But the quarterly trend last year is an intriguing spotlight on the dynamics of decline and recovery.
In the second quarter, with the collapse in spending across so much of the economy, inventories rose from 9.5 per cent to 11.5 per cent of (non-agricultural) GDP. Most of this adjustment was in the denominator. Over the next two quarters, industrial and commercial inventories fell to 9.2 per cent and then 8.2 per cent GDP – comfortably the lowest level since records began.
The June South African Reserve Bank Quarterly Bulletin will show that inventory stocks fell again in the first quarter of this year. It is hard to judge when this cycle will turn and by how much. But when businesses experience both depleted warehouses and rising order-books, their forward production plans will in time be adjusted upwards. At the level of the firm, declining inventories are a positive growth signal.
Macroeconomically, the change in inventories has been a substantial drag on both production and imports over the past year. This will turn over the next year or two, adding perhaps as much as 2 percentage points to gross domestic expenditure. The GDP impact will be more moderate: inventory restocking feeds partly into imports. Nonetheless, as in the past, our economic upswing is likely to be accompanied by upward revisions in “confidence” and “expectations”.
However, buoyancy in output and incomes is not enough to ensure falling unemployment and progress in poverty reduction. The GDP will probably recover to its 2020 Q1 level by the second quarter of 2021. But employment, as measured by the Quarterly Labour Force Survey, was still lagging behind its year-ago level by 8 per cent in March 2021. Far more needs to be done to shift South Africa’s production and expenditure patterns towards a more labour-absorbing growth path.