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After recovering to pre-pandemic levels earlier in the year, South Africa’s GDP contracted in the second quarter. The economy struggled to stay above water amid another bout of load-shedding and the devastating KwaZulu-Natal floods.
Though economists are forecasting that growth will pick up in the second half of the year, they are also not expecting a sprightly bounceback as global recession fears and the country’s structural weaknesses continue to weigh on the local economy.
According to Statistics South Africa on Tuesday, the country’s GDP shrunk by 0.7% in the second quarter of 2022, after seven industries recorded contractions. The biggest losses were recorded in agriculture, manufacturing and mining. The second-quarter contraction coincided with the KwaZulu-Natal floods, which severely hit a province that contributes about 16% to the country’s GDP.
First-quarter growth was revised down slightly, from a better-than-expected 1.9% to 1.7%. The economy is now smaller than it was prior to the Covid-19 pandemic.
However, analysts are not concerned that South Africa will soon fall into a recession, even as economies elsewhere find themselves struggling to avoid a hard landing amid their efforts to bring elevated inflation under control.
The forecast overseas recessions will, however, inevitably bear down on South Africa’s economy, with some expecting far softer growth.
Go-slow
In its economic outlook, released last week, PwC said it expected South Africa’s longer-term growth to converge at around 1.5% per annum. This is even as the global economy records a healthier growth rate of 2.6%.
“If these growth rates could be translated into the speed at which a car travels, South Africa would be driving at 60km/h while the global average is above 100km/h,” the consultancy firm said.
This forecast is in line with the South African Reserve Bank’s expectations for the country’s economy to expand by just 1.3% in 2023 and by 1.5% in 2024. The central bank previously forecast growth of 1.9% for both years.
The bank expects the economy to grow a meagre 0.7% and 0.4% in the third and fourth quarters, respectively. To put that into context, the economy expanded by 1.2% and 1.7% in the two quarters prior to the second quarter of this year.
Alexander Forbes chief economist Isaah Mhlanga noted that the base effects that drove growth in 2021 and in the first quarter of this year — namely the ravages of the pandemic — would no longer be factored into expectations.
“So, what we are going to see is actual growth in the economy that does not take into account the deep contraction in 2020,” he explained. The pandemic caused South Africa’s economy to shrink 6.4% that year.
A European recession will also hit South Africa’s exports. It is expected that Europe’s economies will endure massive strain as the continent enters its winter period, as constraints on Russian energy supplies drive up inflation, forcing the central bank to hike interest rates.
As Europe’s economies slow, so will demand for South Africa’s commodities, and their high prices, which were a considerable source of the economic buoyancy in 2021, will moderate.
“The terms of trade will not be as supportive to growth as they were in the last one and a half years,” Mhlanga said.
“Those are the external factors. That is before we take into account the internal issues, like load-shedding, that will still remain with us and weigh on economic growth.”
Indeed, as Eskom revealed last week, rolling blackouts will be with us for at least the next year, even after President Cyril Ramaphosa breathed life into a plan to end load-shedding for good.
A tapped-out consumer
Sanisha Packirisamy, an economist at Momentum Investments, said softer growth would be driven by weaker consumer spending — which contributes about 60% to South Africa’s GDP.
Despite employment data surprising on the upside in the second quarter of 2022, Packirisamy said she doesn’t expect significant growth on the jobs front. Moreover, asset prices will be turbulent amid global recession fears and it is unlikely that there will be any massive recovery in the housing market.
“For upper-end consumers, wealth conditions tend to direct their spending behaviour. If the price of your home has gone up considerably, and your financial asset portfolios are healthy, you feel wealthier and you go out and spend,” Packirisamy explained.
“But if you are facing lower asset price inflation, and you’re in an environment where house prices don’t recover that quickly, it means that there might actually be a little bit of a lagging on the spending side.”
South Africans with lower incomes are more exposed to food and fuel price inflation, which has ratcheted up in the wake of Russia’s assault on Ukraine. Annual consumer price inflation was 7.8% in July, which is well above the 6% ceiling of the Reserve Bank’s target range.
Green shoots
One factor that could be the economy’s saving grace is fixed investment, which could soon see a revival as a result of Ramaphosa’s energy plan. However, it is unlikely the economy will start to see the green shoots of this investment anytime soon.
In a recent research note, Investec chief economist Annabel Bishop said the president’s plan to end load-shedding would substantially change the domestic fixed investment and, therefore, the country’s growth outlook.
Currently, Bishop noted, 2027 is expected to only see growth of 2.5% year-on-year, as the economy recovers from the global slowdown in 2022 and 2023.
However, she said, the president’s energy and economic recovery plans could lift the country’s GDP growth rate to 4.0% year-on-year by 2027 — if not somewhat higher, depending on global and domestic factors at the time.
“Investing in electricity infrastructure has a twofold benefit, both adding to the economic growth potential of the economy by providing more electricity as the growing economy demands it, but also the build programme itself contributes to growth,” Bishop said.
“The third benefit is a follow-on one … if it is built, investors will invest in projects in other areas of the economy, such as increased manufacturing and agriculture and services sectors, if the regulatory environment is right. These positive knock-on, or multiplier, effects are what have been missing from South Africa’s economy.”
The last time the economy saw sustained growth of 4% or above was prior to the 2008 global financial crisis. In the decade that followed, GDP growth slowed to just 1.7% per year.
The growth the economy recorded between about 2004 and 2008 triggered a marked increase in the number of jobs added to the labour market as the unemployment rate hit a low of 22% in late 2008.
‘Things can’t stay the same’
Even with growth-driving investment on the horizon, the economy stands to be hit by some immediate risks, including climate disasters and social upheaval.
On Monday, political economist Claude Baissac warned that the economy’s structural fragility — which has resulted in an ultra-high unemployment rate and a stagnant tax base — has the makings of a revolution.
South Africa’s economy had flatlined, he said. “It is likely to continue to flatline. And if we continue to have the population growth rate that we have, and the GDP growth rate that we have, it will be an economy that is going to be shrinking.”
Baissac noted that in about 2000, South Africa’s GDP per capita was on par with upper middle-income countries. Today, South Africa is a middle-income economy and, if it continues on the current GDP growth path, the country would be a lower middle-income country by 2030.
This is how revolutions start, he warned, adding that last July’s riots were just a rehearsal for what could come. “We are about to face a revolution. Things can’t stay the same.”
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