Global factors exacerbate our trade weakness

Forecasts for SA’s economic growth rate have been dropping consistently in 2023, from 1.2% year on year at the start of the first quarter to 0.7% in March, 0.6% in April and now 0.4% in the outcome of the May survey (all Bloomberg).

A more recent survey from Reuters in May places the outlook for economic growth even lower, at 0.2% for 2023.

Market perceptions of the global outlook have also dimmed, with China’s economic recovery proving weaker than anticipated after its 2022 lockdowns, as recent production data disappoints, including that on household spending, investment and trade activity.

Global trade defragmentation is also weakening sentiment, with risks of limitations on trade competitiveness growing.

These concerns, along with US recession fears and disappointment over China’s ability to lead the global economy stronger in 2023, have weakened sentiment, reflecting in the recent fall in oil prices.

Markets had expected a ramp-up in economic activity in China in the second quarter, but has also been affected by destocking amid slower sales as consumer demand weakened globally.

The latest supply chain data on sea freight signals such a slowing in demand in its consumer goods shipments. The JPMorgan global manufacturing PMI shows “new orders continued to fall” in April on “a postpandemic switch towards spending on services ... a preference for lower inventory holdings at clients” and still a “rising cost of living”.

S&P Global Market Intelligence adds: “US seaborne imports of containerised freight fell by 15% year over year in April ... the ninth straight decline on that basis. As in previous months, consumer goods led the downturn with a drop of 24%).

“All five of the major sectors that S&P Global Market Intelligence tracks ... experienced a decline. The slowest rate of decline was in capital goods, which in total fell by 1% thanks to a 21% improvement in shipments of electrical equipment.”

Lower global demand has seen a drawdown on input (commodities, components and so on) “safety” stockpiles as inflation fears ease, with moderating inflationary pressures expected to persist in 2023, aiding, it is hoped, the occurrence of a soft landing.

SPARE CAPACITY

April’s global supply chains were reported by the GEP global supply chain volatility index to have had spare capacity since June 2020 on almost a year of higher interest rates, destocking and subdued demand, the report highlights.

Commodity prices consequently fell in the second quarter of 2023 cumulatively to date, after lifting in the first quarter by 7.2% quarter on quarter. The first two months of the second quarter of 2023 reversed the first quarter’s gains on worries over global growth.

China’s huge absorption of commodities has a key influence on commodity prices. With its economic data prints in April tending to disappoint anticipated outcomes after the first-quarter burst of activity, this weakened commodity prices in April.

Besides slowing global demand, SA’s exports have been afflicted by the deterioration in its factors of production (such as electricity supply, freight rail and port, water supply, road infrastructure).

There has been a consequent weakening trend in terms of trade over the past 12 months, adding to rand weakness, with an average trade balance for SA of -R1.7bn in the first quarter versus R20.9bn a year ago. (The number for the second quarter of 2023 was R23.7bn from R16.5bn a year earlier.)

Load-shedding will not end in 2023 or 2024, even with the addition of Karpowership power (which is gas fired and estimated at 1,200MW), as the collapse in Eskom’s capacity is simply far too large, and likely to climb over winter. Eskom says its winter “outlook shows that with breakdowns or capacity unavailable due to unplanned maintenance at 15,000MW, load-shedding might be predominantly implemented at stage 5 for the winter period. Should breakdowns reach 16,500MW, load-shedding might be implemented at stage 6. If unplanned outage averages 18,000MW, loadshedding might be required every day and might be implemented up to stage 8.”

A substantial number of private sector projects have already been bid in various windows, but the state’s bureaucracy needs to quicken the progress of these projects to closure in the regulatory process and so on to construction.

Additionally, the state needs to allow the just energy transition funds available from the international community to be spent on building transmission infrastructure so solar and wind energy can be increasingly generated from the coast and the Cape provinces, with the existing infrastructure having instead been built to transmit electricity from the coal power stations in Mpumalanga and Limpopo to the national grid.

SA does not need to decommission old power stations immediately to access this international finance, and there is no strict timetable. But there is a glide path to decarbonising which SA is already inadvertently following due to the large Eskom outages.