South Africa: Up, Down or Both?
Officially in recession. On the face of it, South Africa's surprising 2017 Q1 growth figure of -0.7%, following a -0.3% print in 2016 Q4, pushed it firmly into recession for the first time since the financial crisis. Moreover, a detailed breakdown showed that output had declined in all but two (agriculture and mining) of its ten main economic sectors which include construction, trade, electricity and government.
Seasonality - it's complicated. But the conclusion about the economy falling into recession is based on a "Seasonally Adjusted Annual Rate" of economic output. Given that much economic behaviour varies according to the time of the year (ice-cream sales and indoor heating usage for example) it makes sense to seasonally adjust the data in order to make valid comparisons and in particular to identify turning points. However, there are many ways of controlling for seasonality (i.e. noting that ice-cream output has historically risen by an average of x% each summer and applying that factor to future sales or allowing the seasonal pattern to change over time by, say, looking at the last few years of data). Indeed, the seasonal adjustment challenge is one reason why official data tends to be revised quite heavily.
Always corroborate. The key problem is that there is no ideal method of seasonal adjustment. Moreover, they can all give different results. It is for this reason that at Afrinomica we also look at straightforward year-on-year comparisons (i.e. 2017 Q1 with 2016 Q1) which should also be free of seasonal influences. In South Africa's case, this reveals a very different picture where growth, although still weak, has picked up over the last year.
The upshot. Of course, these results need not be contradictory. Irrespective of the nuances of seasonal adjustment procedures, markets and policy makers always pay special attention to the adjusted quarter-on-quarter comparison because, in principle, it provides a better steer about economic turning points which might otherwise be missed. Moreover, there is plenty of corporate and survey data that chimes with a notable slowdown in the South African economy over recent months, although the resilience of the Rand is also worth noting. Nonetheless, the annual comparison, which by its nature is less sensitive to short-run shifts in activity, casts some doubt on the likely depth and duration of any slowdown. Consequently, our view that the South African economy will expand by around 0.7% this year, remains intact.