South Africa has entered a technical recession, with Statistics South Africa reporting that the economy contracted by 0,7% quarter-on-quarter (q-o-q) on a seasonally adjusted and annualised basis during the second quarter of 2018.

This follows a downward revised figure of -2,6% q-o-q (previously recorded as -2,2% q-o-q) during the preceding three-month period.

The already-battered South African rand reacted negatively to the StatsSA publication and weakened to well above R15.00 to the US dollar.

PwC reports that the primary sector was again the largest detractor from growth. Agricultural activity fell by 29,2% q-o-q in the second quarter following a 33,6% q-o-q slump in 2018Q1.

According to StatsSA, the decrease was mainly due to a drop in the production of field crops and horticultural products. The strong rise in crop production last year – the maize harvest was the largest on record – resulted in a higher base, where continued strong growth rates could not be sustained.

In contrast to the negative numbers for agriculture, mining activity expanded by 4,9% q-o-q as the volume of platinum group metals (PGMs) increased by 12,1% q-o-q.

While manufacturing activity was down 0,3% q-o-q, other areas of the secondary sector performed better. Utilities grew by 2,1% q-o-q and construction expanded by 2,3% q-o-q – the rise in building activity was the first positive q-o-q number since 2016Q4.

The Bureau for Economic Research (BER) previously reported “continued and improved activity in the non-residential sector” during the quarter, “albeit from heavily depressed levels”.

In the tertiary sector, declines in wholesale & retail activity (-1,9% q-o-q) and transport & communication (-4,9% q-o-q) continued to contrast strongly with the recoveries seen in surveyed consumer and business confidence, respectively. The transport & communication sectors were the largest contributors to the overall contraction in economic activity following agriculture.

General government services contracted by 0,5% q-o-q under the implementation of a more austere 2018/19 fiscal budget.

On a positive note, the finance, real estate & business services industry – the largest sector within the South African economy – expanded by 1,9% q-o-q. Increased activity was also reported by StatsSA for financial intermediation, insurance and real estate services.

The second consecutive q-o-q contraction in economic activity resulted in the South African economy being only 0,4% year-on-year (y-o-y) larger in 2018Q2 compared to the same time last year.

This is the worst growth performance in two-and-a-half years and sets the tone for a weak second half of 2018, according to PwC.

The South African Reserve Bank (SARB) said in May that it expects economic growth to rise from an average of 1,3% last year to 1,7% in 2018. Following the release of disappointing first quarter GDP data in early June, the central bank reduced its forecast for this year to just 1,2%.

Considering average growth of just 0,6% during the first half of this year, the SARB is likely to revise lower its projection for 2018 and 2019 when its Monetary Policy Committee (MPC) meets again in September.