My readers will know that I dislike the obvious. I dislike the conventional ‘up down’ analysis of the day to day markets which in my view contribute to the ‘noise’. What Moe-Knows is about is the bigger picture, what are the trends and what they mean for our long-term investment strategy and philosophy.
As such, it was with reluctance that I embarked on this piece discussing the latest GDP Release in South Africa. No doubt, you will all have been inundated with news and FinTwit expositions about how good or bad the GDP bounce in Q3 was.
Let’s cut through the noise quickly: No, I wouldn’t bother looking at the annualized +66% number given the large distortions that a COVID year brings. It means little.
‘Base effects’ which many will talk about are best described as follows:
If you have R100.00 and you lose 50%, you now have R50. Your new ‘base’ of R50 would need to grow by 100% for you to break even. Hence, a 50% loss is more than a 50% gain off the lower base.
Q3 GDP grew at 13.5% last quarter after falling 16.6% in Q2. Summarized, GDP is down about 5% over the last 2 quarters. Over the last year we are down 6% compared to last year this time and down about 8% for the nine months of 2020 vs. the nine months of 2019. In summary – it’s still bad!
I will spare you the detail of how and why data releases can get spliced but there are many ways to skin the cat. You can find all this detail on the Stats SA website. It is not uncommon for statistics and data, and charts and any other piece of analysis to ‘shaped’ or framed to tell as compelling a story as one needs. It just depends what narrative or agenda needs feeding.
Comparing apples with apples:
There are many ways to look at it, so I will choose one which has always seemed logical to me. SA GDP in today’s rands was around R5trn at the end of 2019. This equates to about R3.15tr in 2010’s rands. The difference is inflation.
Firstly, I will look at REAL GDP data. This means that the effects of inflation are removed by keeping prices constant at a specific year, in this instance 2010. This ensures that we compare apples with apples across years.
Secondly, I will use quarterly data as we are discussing a higher frequency data release, and also, annual data is pointless as it wouldn’t capture the damage done from COVID for context.
Thirdly, one could use seasonally adjusted data or unadjusted data. Seasonal adjustments are important when comparing one quarter to another but for longer term trends (which I am interested in) become less relevant. You could also use the rolling quarterly data which effectively smooth’s the line over the longer term and illustrates more resilient trends.
Is the trend a dead end?
Rather than the trend is your friend, in this instance, lets have a look at long term GDP trends. Firstly, I have truncated the y axis at R2trn. No, I am not being shady, but to emphasize the decline in the recent few quarters, it is more illustrative (I told you data can be ‘shaped’).
The orange line is basically a smoother profile in that the trend is lagged and smoothed over 4 quarters. As such, the extent of the decline seems smaller but will linger for longer. GDP in constant prices peaked in the middle of last year. From that peak to the trough at the end of Q2 2020, GDP contracted by almost R200bn (in 2010 rands) or roughly R320bn (in today’s rands).
Shock and horror, it has been no surprise that the SA economy has been on its knees since before COVID and that this pandemic merely exposed cracks which have thus far been papered over rather poorly. You can see more in my previous pieces on the credit ratings (here), and MTBPS (here and here).
So what does this mean? Well, trend growth in SA has been shifting systematically lower over the last 2 decades and was averaging around 1.5% since 2010 and around 1% over the last five years. This is uninspiring for an emerging market economy and lower than growth seen in large, advanced economies!
To get back to just the 1.5% trend growth GDP levels will require growth rates of close to 3.5-4% over the next 4 years to get us there by 2025. The last time South Africa grew at rates that high was during the commodities boom almost 15 years ago. Probability of getting there soon….slim.
However, to cut through the noise, lets call a spade a spade. SA’s GDP on a per capita basis has been receding since 2014. This is the number that the ratings agencies watch and this is how we compare SA to other emerging markets when competing for capital.
SA GDP per capita – USD (2010 constant prices)
Definitely not in the premier leagues here. Selected EM peers are all set to outshine us as indicated in the charts below.
I wont go into the detail of how GDP is made up – expenditure side vs. production side suffice to say that the outlook remains muted. There are pockets of potential in the economy but they need to be unlocked. That’s a topic for another day. For more detailed analysis and strategy on how this could affect your business, please feel free to reach out here.
If you want to know more about this topic, tune in to my next podcast with The Finance Ghost. We should have it posted by the end of the week and we will discuss GDP and where we see opportunities. I will also update this post with a link once the podcast is live.
For now, check out the podcasts we have already published summarized for your ease below:
Episode 4: Pension Tension:
We welcome our first guest on Magic Markets, ETF and retirement fund expert Nerina Visser to debate and provide a fresh angle on the regulatory changes to pensions in South Africa.
Moe thinks that markets should be free and efficient. Nerina thinks that Regulation 28 needs a rethink. The Ghost is just tired of South African management teams tapping into a trapped pool of capital and then squandering it offshore.
Episode 3: Touch my junk (bonds)
We discuss the role of ratings agencies in the market. What do they do? Why do investors rely on them? What is a downgrade? Are there investors for junk bonds? How does South Africa elevate itself out of junk status?
Episode 2: China’s Electrical Storm
We provide context to Chinese regulation in light of the Ant Group IPO being cancelled for now. The country’s journey to carbon neutrality is also a major source of growth for Tesla and electric vehicles in general.
Episode 1: Rollin’ with the Rand
We kick off our new podcast series ‘Magic Markets’ with a discussion on the complexities of the Rand. Is it over- or under-valued? What drives price movements? What could happen long-term? How should South African investors think about moving money offshore?
See all my podcasts listed here or Click on the podcast platform of your choice below to subscribe:
Spotify, Audible, Castro, Pocket Casts, Stitcher, or Apple.
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