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Fourth quarter GDP remains narrowly outside of contraction

GDP growth slowed in the 4th quarter of 2015. The broad year-on-year slowing growth trend since 2012 is still intact, and wage bill growth may have to be trimmed through labour shedding, reports John Loos, FNB Home Loans household and property sector strategist.

Fourth Quarter GDP (Gross Domestic Product) numbers were released today. The numbers don’t make for exciting reading, although both the quarter-on-quarter and year-on-year growth measures remain narrowly outside of contraction.

On a quarter-on-quarter seasonally-adjusted and annualized basis, real GDP growth was slightly positive to the tune of +0.6%, from a previous quarter’s +0.7%.

But if one views the more smooth moving year-on-year rate of growth, the broad multi-year growth slowdown since 2012 remains in place. From 1.0% year-on-year in the 3rd quarter, the rate slowed further to 0.6% in the 4th quarter. This is the slowest year-on-year growth since the final quarter of 2009.

The “weak links” in terms of industries were Agriculture Gross Value Added, with a year-on-year decline of -14.1% (-14% quarter-on-quarter annualized), as drought impact takes its toll, Mining with a -0.6% decline (+1.5% growth on a quarter-on-quarter annualized basis), Manufacturing with a        -0.8% decline (-2.6% down on a quarter on quarter annualized basis), and an Electricity contraction of -2.9% (+0.9% on a quarter-on-quarter annualized basis).

The only key sector still growing solidly in the 4th quarter was that of Finance, Real Estate and Business Services, whose year-on-year rate was 2.6% (1.9% quarter-on-quarter annualized). But this sector’s growth had also begun to slow relative to the previous quarter.

The slowing year-on-year GDP growth rate comes as little surprise, as we have seen both our own FNB Estate Agent Survey Residential Activity rating, a useful leading business cycle indicator, as well as the SARB and OECD Leading Business Cycle Indicators, pointing the way weaker on a year-on-year basis.

Given a 2-4 quarter lead that our Residential Activity Rating can have over GDP growth movements, it would appear likely that year-on-year GDP growth still has to deteriorate further in the next quarter or 2 at least.

The key impact

We believe that the ongoing broad slowdown in economic growth will impact negatively on the Residential Property and Mortgage Markets, and that further slowing in growth in these sectors is likely in the near term.

We have seen a slowing in the Domestic wage Bill growth rate accompanying the multi-year GDP growth slowdown, which constrains the purchasing power growth in the Housing Market.

From a peak of 12.8% year-on-year growth in the Compensation of Employees back in the 2nd quarter of 2010, this rate has slowed to 7.8% by the 4th quarter of 2015. It has arguably been kept at a still significant level by wage settlements that remain considerably above inflation, and by labour thus being able to increase its share of the take home GDP pie.

What we have seen, therefore, is a steady rise in the Total Wage Bill/GDP ratio, from down around 47% back in 2007 to a 52.44% average for 2015.

But there is a catch to this. As this Wage Bill/GDP ratio rises, crowding out a portion of the economy’s Gross Operating Surplus, so the pressure on the economy to shed jobs, in order to contain this wage bill, rises.

The negative impact of ongoing weakness in GDP growth on Household Spending could thus be felt in two ways.

First, it is likely that Real growth in Disposable Income will continue to broadly slow, as wage bill growth slows further in the near term.

Secondly, the increased job loss, and a lack of new job creation, is likely to dampen consumer confidence. The response should be for the Household Sector to begin to spend more conservatively relative to income, and thus raise its savings rate, as it started to do briefly when the environment became tough around 2008/9.

An increased savings rate, although long overdue, is nevertheless a short term negative for those sectors depending on Household Sector Spending growth.



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