SA economic outlook remains bleak in spite of GDP hike in quarter

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Economic outlook in South Africa has remained bleak for the rest of the year as intensified load shedding dwindles activity, in spite of gross domestic product (GDP) rising for the second consecutive quarter.

This comes as the real GDP expanded by 0.6% in the second quarter or 2023 ending in June after a 0.4% expansion in the first quarter ending in March.

This was better than market forecasts of a 0.1% increase in part due to easing rolling load shedding, but the second quarter GDP remained lower than the peak reached in the third quarter of 2022.

Statistics South Africa (StatsSA) yesterday said six of the 10 economic activities reported positive growth rates, with manufacturing and finance driving much of the upward momentum.

Statistician-General Risenga Maluleke said manufacturing production expanded by 2.2%, mainly pushed higher by petroleum, chemical products, rubber and plastic products.

“Manufacturers in metals, metal products, machinery and equipment also recorded a good quarter, driven in part by increased demand for crude steel. Increased investment in South Africa’s automotive sector helped lift the production of transport equipment and motor vehicles,” Maluleke said.

“The finance industry edged higher by 0.7%, boosted by financial intermediation, insurance and real estate services.”

Oxford Economics Africa head of macro Jacques Nel said South African businesses appeared to have grown slightly resilient to the impact of disruptive rotational power cuts.

“The South African economy’s better-than-expected performance in Q2 2023 comes despite disruptive load shedding and domestic logistical constraints, demonstrating resilience from the supply side,” Nel said.

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

After two consecutive quarters of decline, agriculture turned positive and rose by 4.2% driven by increases in the production of field crops and horticulture products.

StatsSA said favourable weather conditions, increased cultivation and a rise in export demand provided further support.

Mining posted a second straight quarter of growth with platinum group metals, gold, minerals classified in the category ‘other metallic minerals’ and coal helping lift the industry.

However, the transportation industry declined by 1.9% after 18 months of consistent growth as there were declines in land freight and road passenger transport.

The trade industry was down on the back of weaker retail and wholesale figures.

StatsSA said household final consumption expenditure decreased by 0.3% in the second quarter mainly on expenditures on food and non-alcoholic beverages, but expenditures on restaurants and hotels, transport, health and education contributed positively.

Total gross fixed capital formation (GFCF) was up by a very strong 3.9%, driven by machinery and construction works.

“This can partly be ascribed to the energy crisis which forced companies to invest in alternative energy sources such as solar panels and lithium batteries,” said Citadel’s chief economist, Maarten Ackerman.

“However, we have to acknowledge that this is the seventh positive quarter in a row for GFCF. We have not seen a growth streak like this for GFCF in many decades and this speaks to both private and public companies reinvesting back into the economy rebuilding capacity.”

However, other economists warned that the ramping up of load shedding to Stage 6 by Eskom and the persistent logistical challenges were going to disrupt this momentum on economic activity.

According to historical trends of Eskom’s Energy Availability Factor (EAF), the Council for Scientific and Industrial Research (CSIR) flags the risk of higher stages of load shedding, within the maximum Stage 6, in the coming months.

Nedbank economist Crystal Huntley said load shedding had returned with a vengeance as Eskom resumed regular maintenance, while other logistical constraints also continued to drive up operating costs and weigh down activity.

“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,” Huntley said.

“Load shedding will likely persist at higher stages during the remainder of the year. Power outages and other logistical constraints will continue to disrupt output, inflate operating costs, and erode profitability across all industries.”

North West University Business School economist Professor Raymond Parsons said though the better-than-expected GDP growth was welcome news, there remained a high degree of volatility in the growth dynamics.

“For now, the balance of risks to growth prospects remains on the upside. Load shedding in early September is already back to Stage 6, illustrating the extent to which Eskom blackouts hold South Africa’s growth performance hostage,” Parsons said.

“And 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.”