For the third time in two years and a bit, GDP took a dive. The 1Q16 was 1.2% down on the 4Q15 at an annual rate. Perhaps equally startling, GDP dropped by 0.2% in 1Q16 year-on-year, the first time since the 2009 recession to do so. What does this signify?

I find the data very much up-and-down between quarters, as if the economy can't make up its mind where to go. But when going deeper into the numbers, the pain on the production side of the economy is very much located in mining and agriculture, while on the spending side it is household consumption and fixed investment that make the kneefalls.

Why?

The drop in farming output is obviously drought related. The much bigger drop in mining output in 1Q16 is less obvious. In 2014 we had a five-month platinum strike to blame. Not this time. It appears to have to do more with the impact of the global commodity superbust, mining closures or otherwise shipping from inventories.

On the spending side of the economy, we also find three quarters dipping in the past nine quarters, with 1Q16 actually the least severe of them. What I find much more omnious, when going deeper into the spending side, that though 30 months ago household spending struggled for three quarters there were major strikes to blame. Thereafter, for two years robust household consumption growth quarter after quarter, until suddenly falling off a cliff in 1Q16.

This doesn't look one of those incidental drops. Instead, we know that 2014-2015 was strongly boosted by generous public sector wage increases, that the private sector wages were also still on board, that inflation dipped (courtesy of falling oil prices, boosting real purchasing power) and that job losses hadn't yet started to connect on a major scale.

When we look back over the past six months that picture looks quite different. The public sector is being subjected to restraint, the private sector experiences job losses, unsecured credit lending has been massively curtailed, inflation has shot up for drought- and Rand-related reasons, eroding real purchasing power.

Thus we find households experiencing much more financial strain, and this reflected at consumption spending level. Especially durable purchases have been experiencing recession conditions for some time, with the motor trade badly hit.

Though fixed investment spending offers a somewhat different tale, it is also going down, two quarters in a row registering real spending declines and the past five quarters already clearly out of sorts. Here the lack of private business confidence seems to be playing a major role, with non-residential building trade, transport equipment, residential buildings and machinery/equipment all falling in real terms.

For future quarters it remains to be seen which sectors will stage revival and which could sink. Farming may at some point recover once rainfall patterns normalise. Mining, too, may have perhaps over-adjusted, but then the global commodity adjustment is hardly at an end. The motor trade and building sectors may struggle for longer, while other sectors may still loose momentum.

In this respect, the household spending slide may not be at an end yet, with too many headwinds eroding real disposable income. And business confidence is plumbîng the depths, suggesting that fixed investment may also remain subdued.

That suggests struggling GDP for some while longer.

Cees Bruggemans
Bruggemans & Associates, Consulting Economists
Website  www.bruggemans.co.za
Email. economics@bruggemans.co.za
Twitter  @ceesbruggemans
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