GDP data shows economy still recovering, but no good news

The latest GDP data for the second quarter shows that the economy is still recovering, as it is still below the figures for the third quarter of 2022. The South African economy’s better-than-expected performance of 0.6% is thanks to more moderate Eskom blackouts in June compared to April and May, as well as other mitigating factors.

Economic research group Oxford Economics Africa says the increase in GDP (gross domestic product) comes despite disruptive load shedding and domestic logistical constraints, demonstrating resilience from the supply side.

“Increased private sector investment in electricity generation capacity supports the demand side, but consumers are experiencing strain due to elevated prices, high interest rates and household consumption expenditure contracted in the second quarter. We expect this trend to persist in the second half of 2023,” Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

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The economy’s supply side is proving more resilient than initially thought and shows that the wheels continue to turn, albeit sluggishly, he says.

“Increased private sector investment in electricity generation capacity supports the demand side, but households are experiencing strain due to elevated prices and high interest rates.”

Van der Linde says the group expects to see modest real GDP growth over the coming quarters, with odds of a quarterly contraction in the third quarter remaining high. However, rising fuel prices, electricity supply constraints and logistical bottlenecks will continue to undermine the economy’s performance.

“Although the latest upside GDP surprise is likely to see upward revisions to analysts’ 2023 growth forecasts, including our own of 0.4%, the South African economy is not out of the woods at all. Next year’s national elections present novel uncertainty with the country’s macroeconomic fundamentals weaker than before the pandemic amid widespread impediments to growth.”

High degree of volatility in growth dynamics

Prof Raymond Parsons, NWU Business School economist, says the GDP growth is welcome news and demonstrates a noteworthy degree of resilience in the economy.

“Nonetheless, there is still high volatility in the growth dynamics.”

He says this is apparent in the wide divergence in growth forecasts for the second quarter, ranging from 0.1% to 0.7%.

“It is a reflection, not only of the difficulties in quantifying the biggest supply obstacles in the economy, but also of being a significant source of uncertainty in growth expectations.”

For now, the balance of risks to growth prospects remains on the upside, he says.

“Load shedding is already back to level 6, illustrating the extent to which Eskom’s rolling blackouts hold South Africa’s growth performance hostage. In addition, other economic data, such as retail sales and credit demand, remain weak as a result of higher borrowing costs and rand depreciation, which cut disposable income.”

Therefore, the economy still struggles to gain sufficient momentum to sustain a higher rate of job-rich growth, Parsons says.

“A growth outlook of less than 1.0% for 2023 as a whole, with not much better rates expected in 2024, has immediate negative implications for fiscal sustainability, as tax revenues fall short of projections and government spending exceeds planned budget levels.”

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Economists at the Nedbank Group Economic Unit say less severe load shedding made all the difference, enabling manufacturing, mining and agricultural output recoveries.

However, the cumulative 475-basis-points increase in interest rates is taking its toll on domestic demand, evident in the value added by domestic trade, transport and communications, and construction contracting.

They say underlying economic conditions will likely worsen in the final stretch of the year.

“As expected, load shedding intensified in recent weeks as Eskom resumed regular maintenance and unplanned outages remained high. Load-shedding will likely persist at higher stages during the remainder of the year.

Power outages and logistical constraints will affect GDP

“Power outages and other logistical constraints will continue to disrupt output, inflate operating costs and erode profitability across all industries. At the same time, the downturn in the global economy and international commodity prices will intensify.”

The Nedbank economists say that much tighter monetary policies will subdue demand in advanced countries, while China’s faltering recovery will likely contain activity in other developing countries.

“Against this background, value added by mining and manufacturing, which together account for close to 20% of GDP, will come under renewed pressure. The outlook for agriculture is clouded by the threat of El Niño, which is usually associated with drier weather conditions.”

Services are also expected to face stronger headwinds, with domestic demand likely to weaken significantly as the financial strain on household incomes and company profits intensifies.

They say the external position will continue to weigh, with exports falling short of imports.

“At the same time, the slowdown in domestic demand will deepen. Household confidence and finances are expected to remain fragile due to mounting debt service costs caused by higher interest rates and increased borrowing.”

They also warn that the tough economic environment will likely undermine job creation in the second half of the year. Even if employment holds up, households will probably remain cautious, fearing that the electricity crisis and the weak economy could threaten job security and undermine earnings prospects.

“Meanwhile, private firms are expected to become more reluctant to undertake significant capital expenditure. With fading profits and poor growth prospects, more companies will likely opt to reduce costs, leading to the scrapping or postponing of large capital expenditure plans.

“As a result, we still expect growth in fixed investment activity to slow, but the downside will be contained by increased activity in the renewable energy sector. Finally, government spending will probably increase further, driven by higher wages.”

Given the better-than-expected outcomes of the first half of the year, the Nedbank economists revised their GDP growth forecast for 2023 to around 0.6% from 0.4%.

“However, we still expect the economy to weaken in the second half of the year, with significant downside risk.”