Don’t be fooled by South Africa’s GDP growth – experts

South Africa’s economy grew by 0.4% in the first quarter of 2023, defying expectations that the country had fallen into a technical recession. However, experts warn that this growth does not mean South Africa is on the road to recovery.

The country’s GDP growth in Q1 2023 was largely fueled by transport, construction, and manufacturing.

The growth in this quarter surprised many, as South Africa’s GDP contracted far more than expected in Q4 2022, shrinking by 1.3% and setting off alarm bells for an incoming recession.

The South African economy narrowly avoided this by growing in the first quarter despite factors like load-shedding and high interest rates weighing it down.

However, experts say the growth does not mean the economy is not still feeling the impact of these factors, as, only a year ago, the economy grew by 1.5%.

Maarten Ackerman – Citadel chief economist

Citadel chief economist Maarten Ackerman said that, despite the Q1 GDP growth, South Africa’s economy is already in a recessionary environment due to all the headwinds it is facing.

It grew by only about 0.2% in the past year, putting pressure on social support, and Citadel’s analysts foresee a low growth rate, of less than 0.3%, for the rest of the year. 

“Population growth is outstripping economic growth, and, to my mind, that means we are already in a per capita recession,” he said.

South Africa’s most pertinent challenges, including record high load shedding, over-budget wage demands from trade unions and the battered rand, are putting “enormous strain on South Africa’s fiscal framework”.

However, increasing gross fixed capital formation, for the sixth quarter in a row, remained a “beacon of hope” and a sign of private and public sector investment into the economy, including more renewable energy and residential and commercial construction.

Consumers are, however, “feeling the pinch”. “The average South African is facing lower take-home pay, high unemployment (the third highest in the world), high inflation and rapidly increasing interest rates counter to the rest of the world.”

Ackerman is particularly concerned about the weak rand. “The country’s current account deficit has seen us pay more in foreign currency to secure our imports, placing the local currency under pressure,” he said. 

The rand’s woes, coupled with the country’s “no-growth environment”, are resulting in the South African Revenue Service not being able to meet its tax collection targets, forcing the National Treasury to borrow more.

This will increase the country’s debt-to-GDP ratios and negatively impact the local currency again. This concern could also be seen in the GDP announcement, as the government’s final consumption increased by 1.2%.

This will put more pressure on the national budget, said Ackerman.

“Given that central banks are committed to bringing down what is very sticky inflation and that the cracks in the system are already starting to show, we must prepare ourselves for a difficult economic environment over the next few quarters.”

Thanda Sithole – FNB senior economist

FNB senior economist Thanda Sithole said the economy’s growth in the first quarter defied their expectation of a mild technical recession following the previous quarter’s contraction.

However, he said that, compared to the same quarter last year, the economy only expanded by 0.2%, which is consistent with expectations of a material slowdown in real GDP growth this year.

“The outcome suggests that GDP is around the pre-pandemic 2019 level and still weighed on by the lingering impact of the pandemic and the July 2021 social unrest,” he said.

“Meanwhile, hard power shortages, logistics challenges, elevated inflation, and rising interest rates are keeping the economy stuck in the lowest gear, with more pronounced near-zero quarter-on-quarter variations.” 

According to Sithole, this means economic growth remains fragile and vulnerable to economic shocks.

However, surprisingly, all the country’s energy-intensive sectors expanded despite intensified load-shedding in Q1 2023 compared to Q4 2022. 

“If sustained, this may be a more concrete indication that corporates are being innovative and increasingly becoming less reliant on the electricity grid to sustain production.”

Sithole said the marginal upside surprise from the first quarter may push FNB’s 2023 growth expectation of 0.1% higher. 

However, this forecast is clouded by the likelihood of more intense power outages in winter. 

In addition, real wage growth remains limited, and the impact of the South African Reserve Bank’s cumulative 475 basis points rise in interest rates is still filtering through.

Hugo Pienaar – BER chief economist

Bureau for Economic Research (BER) chief economist Hugo Pienaar told eNCA that the country’s GDP growth in Q1 2023 can largely be attributed to the normalisation of economic constraints seen in Q4 2022.

He said despite the intensification of load-shedding, there were very specific constraints in Q4 2022 that drove GSP negatively and that are now recovering.

There were two major factors that led to a contraction in Q4 2022’s that have normalised or lessened in Q1 2023:

The first factor relates to the production side of GDP, particularly the financial sector, which is usually the economy’s biggest sector.

Pienaar said the financial sector saw an outsized decline in Q4 2022 that has since normalised in Q1 2023.

Secondly, on the demand side, South Africa saw a massive dip in exports in Q4 2022, largely as a result of logistical constraints, such as strikes at Transnet and a coal derailment in November 2022.

While these constraints have mostly normalised, Pienaar warned that similar logistical constraints could be seen in Q2 2023.

He referred to reports on corridor restraints in Durban and Johannesburg and an iron ore line in Saldanha that has experienced a cable theft incident and derailment.

In addition, load-shedding has been as intense, if not more intense, in Q2 2023 compared to Q1 2023.

These factors could mean another shock when the data for Q2 is released.

Overall, Pienaar said 2023 is a “write-off” in terms of growth, despite the modest momentum seen in the first quarter. 

Kevin Ling – Stanlib chief economist

Stanlib chief economist Kevin Lings told Business Day TV that he welcomes the positive number and believes it could help with the recent negative sentiment towards South Africa.

However, he does not think it indicates a pick-up or improvement in the economy’s growth.

He said the data he has seen so far for the second quarter of the year is fairly weak, and the intensity of electricity outages in the quarter has worsened the environment.

Like Pienaar, Lings cited logistical constraints as a potential constraining factor for growth in Q2 2023.

In addition, he said there is a lot of pressure on consumers, which will only intensify if interest rates are increased further.

However, he said some optimism can be found in the fact that South Africa avoided a recession and that the economy is now back to pre-Covid-19 levels.

“It’s taken us a long time, but at least we’ve gotten to that benchmark,” he said.

Adriaan Pask – PSG Wealth CIO

PSG Wealth CIO Adriaan Pask said 8 of the 10 industries tracked by Stats SA recorded growth in the first quarter despite record load shedding, with manufacturing, finance, real estate, and business services making the biggest contributions to growth.

However, Pask said protracted load-shedding and continued political uncertainty are expected to weigh on the economy and investor sentiment.

Despite this, he said low economic growth and political risks are already priced into very depressed valuation levels in large portions of the local market. 

Therefore, PSG Wealth’s outlook for local equities remains favourable.

“While it can be difficult to resist the urge to make adjustments to portfolios in light of a challenged economic backdrop and often sensationalist market reports, clients are best served by focusing on their long-term plans,” he said.


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