Decrease in economic growth not a surprise – economists

The decrease in economic growth of 0.2% for the third quarter did not come as a surprise, economists say, although it was worse than expected after two consecutive quarters of growth. What was surprising was the nosedive in agriculture, which contracted by 9.6%.

“The stop-and-go South African economy is undermined by numerous supply-side constrains, while an increasingly onerous business environment erodes profitability. Domestic demand remains soft as households contend with high interest rates and elevated inflation. Conditions are not expected to get much easier over the near term,” Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

“The outcome was slightly worse than our expectation of 0.1% quarter-on-quarter growth, but the decrease did not come as a surprise as we noted that the odds of a quarterly contraction were high.”

He says data releases over the next few weeks will provide valuable insight into whether the domestic economy might enter a recession in the fourth quarter, but it is still too early to say at this stage.

“It is certainly possible as port congestion and load shedding have worsened considerably. Aside from the unforeseen factors that knocked agriculture, most of the prevailing economic weakness is of an idiosyncratic nature.”

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Economic growth revised down for 2023

Van der Linde says the latest contraction in overall gross domestic product (GDP) means that the South African economy is likely to grow by 0.6% in 2023, compared to the previous forecast of 0.8%. “In addition, given the supply-side constrains and weak demand, growth will remain sluggish, with real GDP growth expected to come in at around 0.8% in 2024.”

GDP in the third quarter remains little changed from the pre-pandemic levels of the first quarter of 2020, indicating that the South African economy has not really gone anywhere in the last three years and that is not expected to change in the near term, he says.

“We forecast real GDP to grow by about 1.2% per year between 2023 and 2027, only marginally higher than the 1.0% average of the five years before the pandemic.

Reza Hendrickse, portfolio manager at PPS Investments, says the primary as well as the secondary sector both contracted, while services experienced modest growth. Mining and agricultural output also declined, weighing on the primary sector. The secondary sector was affected by weaker manufacturing output and construction.

“The growth environment in South Africa remains constrained, as recent PMI data indicated. Although growth continues to be unimpressive, it is worth pointing out that growth managed to exceed expectations in most quarters during recent years. We even managed to deliver muted growth despite 2023 being the worst load shedding year on record and despite numerous other challenges.”

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More negative than positive in economic growth

Prof. Raymond Parsons, NWU Business School economist, agrees that the decline in GDP growth was worse than expected, with negative factors clearly dominating the positive ones to a greater extent than anticipated.

“Although there was a temporary improvement in energy availability, several other key high-frequency indices at the time already warned of a loss of economic momentum. Similar economic trends are likely to also prevail in shaping a likely weak GDP growth outcome in the fourth quarter.”

Parsons warns that the decline in fixed capital formation is also a red flag. “The year is likely to end with muted economic activity. South Africa must now avert the possibility of a technical recession, which happens when there are two consecutive quarters of negative growth.”

Apart from other global and domestic headwinds, Parsons warns that growth expectations remain heavily dependent, in particular, on phasing out load shedding, with the bottlenecks in Transnet’s rail and port services adding heavy additional costs to the economy.

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Effect of problems in logistics caused lower economic growth

Goerge Herman, chief investment officer at Citadel, points out the pervasive impact of South Africa’s faltering transport and logistics sectors and the knock-on effect it has on the broader South African economy.

“After the economic expansion over the first two quarters of 2023, this was a reality check. While economic contraction is never welcome, it is important to remember that these figures are backward-looking, and in light of the combination of load shedding and high interest rates, this result was not unexpected.”

Herman says the key takeaway from the GDP figures is that we must get our transport and logistics sectors working. “This is not only limited to the backlogs at the ports and borders but throughout our economy as road freight volumes were also down.

“Looking at the household data, strained consumers cut back on consumption expenditure for a second consecutive quarter, reducing their spending on items such as transport, recreation and housing utilities.”

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Decline in agricultural GDP was a surprise

Paul Makube, senior agricultural economist at FNB Commercial, says despite some of the earlier indicators pointing to a potential upswing in agriculture GDP, the sector surprised on the downside with the biggest and sharpest contraction, underpinned by a slowdown in economic activity for field crops, animal products and horticulture products.

“However, the bulk of the bumper harvest of the 2023 summer crops happened in the third quarter, but the downbeat prices offset what could have been an excellent quarter. The total summer crop harvest was massive at 20.74 million tons which is 6.8% higher year-on-year, with South Africa’s biggest staple at 17.06 million tons and 6% higher compared to a year ago. Soybeans were up 24% at a record high of 2.76 million tons.”

He notes that there has been a negative price growth for beef and pork, with poultry mostly flat while overall livestock slaughter fell by 8% relative to the previous quarter. The livestock subsector also grappled with disease outbreaks such as avian influenza in the poultry industry, and given its sheer size of 42% of total agriculture gross producer value, any decline in the subsector activity makes a huge dent in overall agriculture growth.

“Agriculture exports had an impressive performance, with the value of export earnings jumping by 4% year-on-year to US$3.9 billion. Maize continued to enjoy strong growth in exports, with an impressive 8.5% year-on-year surge in volumes exported at 1.64 million tons, dominated by yellow maize (81%) followed by white maize (19%), according to the South African Grain Information Services (SAGIS) data.”