On the day Statistics South Africa announced the country’s economy had shrunk 0.7 percent, with load shedding and heavy flooding in KwaZulu-Natal driving the contraction, ailing power utility, Eskom announced it will be imposing yet another week of rolling blackouts across the land.
The power utility said the load shedding this time was caused by a shortage of generation capacity owing to breakdowns and delays in returning some generating units to service, leading to stage 2 load shedding between 4pm and 10pm today, Tuesday, until Saturday.
Maarten Ackerman, Chief Economist and Advisory Partner at Citadel, says that South Africa is at risk of a technical recession if repeated in the third quarter.
“Not only is the local economy currently negatively impacted by global events, such as a strong slowdown in economic activity in most of our trading partners, but local issues, such as record levels of load shedding and recent floods in KwaZulu-Natal have clearly had a detrimental impact on growth.” says Ackerman.
Year-on-year, GDP increased by a disappointing 0.2%. “The movement was so close to zero, it was basically flat. Although we recovered to pre-pandemic levels in Q1 this year, we have now slipped back to pre-pandemic levels. In rand billions, the South African economy remains at 2018 levels which speaks to the structural issues holding back our growth. While the economy is stagnating, the population keeps on growing which adds to the unemployment and social issues we are dealing with,” explains Ackerman.
Non-energy dependant industries show some growth
In total, seven industries contracted in the second quarter of 2022.
Ackerman says the primary sector was the hardest hit, contracting by 5.1%.
As the biggest negative contributors to this contraction, the previously booming agriculture and mining sectors reported decreased production of animal products, gold, coal and diamonds, due to power supply and export difficulties.
“This is unsurprising as the sector is heavily dependent on energy, which was a scarce commodity in Q2 due to load shedding,” says Ackerman.
The secondary sector was also significantly impacted by load shedding, contracting by 4.8%.
“The biggest production delays were reported in the petroleum, chemical products, food and beverages manufacturing sectors, which declined by 5.9%. The 1.2% decline in the collective electricity, gas and water industry growth rate was driven by the decrease in electricity consumption.”
It was only the tertiary industry that printed a positive number (up 0.7%) for the quarter.
“This happened despite the 1.5% contraction by both wholesale and retail trade which recorded a decrease in economic activity. If we look at the sectors that are slightly less energy dependent such as transport, storage and communication (which grew 2.4%), finance, real estate and business (which grew 2.4%), as well as personal services (which grew 0.1%), most of them made a positive contribution over the quarter. This clearly shows the severity of our energy crisis and how quickly we need to solve it,” explains Ackerman.
Ackerman further said, “It’s encouraging to see that household consumption grew by 0.6% quarter-on-quarter and is reasonably stable despite high unemployment and inflation printing at a 14-year high.”
While the collective trade, catering and accommodation industries saw a 1.5% contraction in Q2, it was encouraging to see 6.2% growth reported by the restaurant and hospitality sectors.
“This is positive news for tourism as we head towards the festive season. The 0.6% increase in transport is mostly attributed to the fuel increases we experienced in Q2 as households had to reprioritise.”
Imports increased by 5.6% in Q2, while exports only increased by 0.3% showing a correlation between South Africa’s enduring logistical hurdles and the income it derived from exports, says Ackerman.
Industries operating at pre-pandemic levels
Sanisha Packirisamy, economist, research and insights from Momentum Investments, said, “The latest GDP figures leave overall economic activity marginally below pre-pandemic levels. A poor performance across large sectors of the economy has resulted in six out of the 10 South African (SA) industries operating below average levels calibrated for 2019.”
“We expect growth to average 2% in 2022, before slowing to 1.7% in 2023. This year’s growth forecast is in line with the August 2022 Reuters Econometer poll but our expectations are firmer than their 1.5% prediction for 2023. Our projection for 2022 is in line with that of the SA Reserve Bank’s (SARB), although they paint an even gloomier picture for growth of 1.3% for 2023,” she further said.
Positives from the data released
The biggest positive from the Q2 GDP results was that South Africa had a third consecutive positive quarter for Gross Fixed Capital Formation (GFCF) which, over the past decade, has had more negative quarters than positive ones.
“It’s very encouraging to see this trend emerging and it seems to be getting stronger. This is in line with some of the other fixed investments we see in the economy. The positive performance of our GFCF is clear evidence that the economy and companies are reinvesting back into the economy and increasing the future capacity. Investments in things such as transfer costs, machinery and other equipment, non-residential buildings and other assets are encouraging and usually pave the way for better and stronger growth in the long-term,” Ackerman further stated.
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