Grinding into recession
The economy buckles under power cuts and other ills, posting a dismal -1.3% quarterly growth
After a bumper third quarter, the South African economy contracted far more steeply than expected in the final quarter of the year, though it still managed to post growth of 2% for 2022 as a whole.
The 1.3% quarter-onquarter (q/q) contraction in the final quarter of the year, against the Bloomberg consensus expectation for -0.4%, makes it likely that South Africa is in the midst of a technical recession (two quarters of negative growth).
Economists had widely expected the fourth-quarter GDP reading to be bad, given that the economy had only two days without load-shedding — most of it above stage 3 — over the quarter. The country was also battered by interest rate hikes, rising living costs, a Transnet strike that hurt exports, heightened political uncertainty and fading confidence.
The Nedbank Group Economic Unit warns that since trading conditions deteriorated even further in early 2023 as the intensity of load-shedding increased, growth likely contracted again in the first quarter of this year.
This means the economy is likely in a recession. And since most economists were not expecting the fourth-quarter figure to be so bad, some will now likely revise down their 2023 growth forecasts, causing the consensus to shift below the meagre figure of 1% currently pencilled in.
Stats SA provided further sobering news, revealing that though GDP reached an alltime high of R4.6-trillion in 2022, up from R4.5-trillion in 2021, in real terms the economy is just 0.3% bigger than its 2019 pre-pandemic level of R4.58-trillion. This means economic growth has lagged significantly behind the 3.5% growth in the country’s population since then.
Also worrying is that six of the country’s 10 industries have yet to recover to their pre-pandemic production levels.
Construction is now
23% smaller than it was in 2019. Mining has also been hard hit. Despite a multiyear commodity boom, the sector’s output was
8.1% lower in 2022 than in 2019. The manufacturing sector is 6.8% smaller and, unsurprisingly, the sector in which electricity falls is down 6.3%.
Only four sectors exceed their pre-pandemic levels: agriculture (up
25%), the finance sector (up 8%), personal services (up 6.2%) and government services (up 0.5%).
For 2022 as a whole, the mining sector was the biggest drag on growth. It contracted 7% year on year (y/y), which subtracted 0.3 percentage points (pp) from whole-year growth. The sector was hammered by load-shedding and the incapacity of Transnet’s rail freight division.
Transnet’s failure to get goods to port also shows up in South Africa’s export numbers, which were down 7.5% in 2022 compared with the previous year. This subtracted 2pp off
GDP growth, measured from the expenditure side of the economy.
The other big underperformers in 2022 were the construction sector, which contracted 3.5% y/y and the electricity sector, down 2.6% y/y.
The biggest contributors to growth in 2022 were the finance sector (up almost 4% y/y), the transport, storage and communication sector (up 8.6% y/y), and trade, catering and accommodation (up 3.5% y/y).
Turning to the dismal fourth-quarter contraction of 1.3% q/q, the biggest surprise
and disappointment was that the usually robust finance sector shrank 2.3% q/q — the largest contraction in its history, other than at the start of Covid. As this is the largest sector in the economy, it also exerted the biggest drag, subtracting 0.6pp from fourthquarter GDP.
The volatile agricultural sector contracted by even more (-3.3% q/q after growing 30.5% q/q in the previous quarter), but because it is so small, it shaved only 0.1pp off the quarterly growth rate.
Mining output decreased 3.2% q/q, and mining profitability contracted 11% y/y in the fourth quarter. This suggests that the revenue windfalls the fiscus has enjoyed since 2020 are unlikely to hold up.
Viewed from the expenditure side, the bright spots were that gross fixed capital formation (fixed investment) and household final consumption expenditure grew more strongly than expected, by 1.3% q/q and 0.9% q/q respectively.
Over 2022 as a whole, gross fixed capital formation was up 4.7% y/y, while household final consumption expenditure was up 2.6% y/y. The resilience of these two sectors is encouraging, as they are critical to supporting South Africa’s future economic performance.
Though the weak fourthquarter growth outcome could be seen as reducing the odds for further domestic rate hikes, economists say that given sticky global and domestic inflation, a hawkish Federal Reserve and the inflationary impact of load-shedding, a 25 basis point hike at the Reserve Bank’s March meeting remains on the cards.
Economists had widely expected the fourth-quarter GDP reading to be bad – but not this bad