Recession looms for South Africa

South Africa’s GDP contracted more in the last quarter of 2022 than expected, with FNB saying that the country will likely enter a technical recession at the end of the first quarter of 2023.

As measured by GDP, the economy contracted 1.3% in the last quarter of 2022, following growth of 1.8% in the third quarter.

The country performed worse than the expected 0.4% contraction and Bloomberg’s consensus of a 0.5% contraction.

The contraction was broad-based, with all goods-producing sectors relapsing, underscoring the severe impact of intensified load-shedding in the corresponding quarter.

GDP grew by 0.9% year-on-year, reflecting a moderation from the base effect-induced growth of 4.2% year-on-year in the third quarter.

GDP growth averaged 2.0% in 2022, underwhelming analyst expectations and moderating from 4.9% in 2021. The level of GDP backtracked and was R1.43 billion below the 2019 level.

Nominal compensation of employees grew by 4.1% year-on-year, reflecting a moderation from 5.0% previously.

Compensation averaged an increase of 5.2% in 2022, down from the post-lockdown rebound of 6.8% in 2021, but still higher than 4.5% in 2019. This reflects the sustained cost of living pressures, with headline inflation of 6.9% in 2022.

Household expenditure increases

On the expenditure side, household consumption expenditure grew by 0.9% in Q4 2022, following a 0.3% quarterly decline in the third quarter.

Services consumption grew by 1.4%, rebounding from a 0.2% contraction, while durable goods consumption grew by 2%, up from 1.4% in the prior quarter.

Non-durable goods consumption shrank for the third successive quarter, reflecting strong consumer headwinds for low- and middle-income consumers.

Overall consumption expenditure averaged 2.6% in 2022, moderating from 5.6% in 2021, but was more robust than the 1.2% average growth in 2019.

Gross fixed capital formation continues to grow

Gross fixed capital formation (GFCF) grew by 1.3%, up from 0.3% in the prior quarter, primarily supported by private enterprises’ fixed investment, up by 1.5%, from a 0.6% contraction.

General government fixed investment grew by 2.5%, from 3.5%, while fixed investment by public corporations declined by 2.3% from growth of 0.6% in the third quarter.

Total GFCF growth was 4.7% in 2022, up from 0.2% in 2021.

However, GFCF is still 10.4% below the 2019 average level. In 2022, inventory amounted to R35.98 billion, reflecting a solid restocking following a R20.60 billion destocking in 2021.

Outlook is dire amid load-shedding and slower global growth

FNB expects the economy to soften from 2% in 2022 to a meagre 0.4% this year before gradually recovering to 1.4% next year and 1.6% in 2025.

The most significant threat to economic stability is the ongoing hard power shortages which, by FNB’s current forecast, have effectively pushed the economy into a two-quarter technical recession between the fourth quarter of 2022 and the first quarter of 2023.

Should the high levels of load-shedding persist, surpassing what is currently envisaged in FNB’s baseline throughout 2023, a prolonged recession will be likely.

Private sector fixed investment growth will be curtailed, threatening the job market recovery.

Slowing global growth, especially from South Africa’s major trading partners, and logistical constraints could limit export volumes, further depressing economic growth and government revenue.