Last kicks of a dying horse?

GDP data flatters a little and deceives a bit too

South Africa has avoided a technical recession. But though the latest GDP data is weakly positive, the economy is clearly staggering under the weight of intense load-shedding, high inflation and waning confidence.

In the first quarter (Q1) of this year, the economy expanded 0.4% quarter on quarter (q/q), in line with consensus expectations.

However, the data was flattered by the low base established in Q4 last year, when GDP contracted by a revised 1.1% q/q (previously -1.3% q/q). So, even though the final outcome is slightly positive, economists caution against interpreting this as a reflection of a remarkably resilient economy.

A more accurate reading, they say, is that severe power outages, the high cost of living, heightened political uncertainty, and low confidence have reduced South Africa’s growth rate to the cusp of zero.

With intensified load-shedding expected as winter progresses and given the negative sentiment reflected in declining purchasing managers’ indices, weaker GDP readings likely lie in store. Most growth forecasts have converged around 0.2%-0.3% for the year as a whole.

“Low base effects saved GDP from negative territory in Q1,” says Citi economist Gina Schoeman. “However, the Q2 GDP number is likely to be negative, given worsening load-shedding, still sticky inflation and high interest rates.”

In a presentation, Stats SA noted that even with the economy’s 0.4% q/q expansion, real GDP at R1.152-trillion in Q1 2023 remains slightly below the recent peak of R1.161-trillion reached in Q3 2022 and is roughly back to where it was in Q1 2020 (see graph).

On a more positive note, eight of South Africa’s 10 industries recorded growth in the first three months of the year, led by the manufacturing sector — up 1.5% q/q from -1.5% q/q in the previous quarter.

Fortunately, the historic wipeout that the finance, real estate and business services sector experienced in Q4 2022 has been reversed. Not only has Stats SA revised up its Q4 contraction from -2.3% q/q to -1.6% q/q, but the sector managed to grow 0.6% q/q in Q1, contributing positively to overall quarterly GDP growth.

Also encouraging is that the construction sector achieved positive growth (1.1% q/q) for the third quarter in succession. Before that it had contracted for five straight quarters.

After a disappointing end to 2022, mining activity also turned positive in Q1, improving to 1% q/q from -0.6% q/q in the previous quarter, led by platinum group metals and gold.

The trade sector also registered growth of 0.7% q/q, with positive results from wholesale trade, retail trade and catering and accommodation.

Notable contractions were, however, experienced in the electricity, gas and water sector (-1% q/q), for the fourth consecutive quarter, and in agriculture. The latter slumped 12.3% q/q, weighed down by a decline in the production of field crops and animal products. Agriculture was the biggest drag on growth in Q1, subtracting 0.4 of a percentage point from the quarterly total.

Field crops had a tough start to the season because of excessive rains, foot-and-mouth disease affected the cattle industry and load-shedding disrupted poultry production. Nevertheless, Wandile Sihlobo, chief economist of the Agricultural Business Chamber, expects that a “robust performance” over the coming quarters will boost the sector’s growth to 3% for 2023 as a whole — up from 0.9% last year.

Measured from the expenditure side, Q1 GDP also came in at 0.4% q/q, suggesting that there is still some life in the demand side of the economy.

Mirroring the rise in construction, gross fixed capital formation (GFCF) achieved modest growth (1.4% q/q) — for the sixth quarter in succession. While the private sector and public corporations made small positive contributions to GFCF, the biggest driver of fixed investment during the quarter was general government.

Also positive is that household final consumption expenditure rose 0.4% q/q in Q1, contributing 0.3pp to total growth.

The main driver was spending on restaurants and hotels, which grew 6.9% q/q during Q1, followed by spending on health care (2.6% q/q) and on food and nonalcoholic beverages (1% q/q).

The resilience of GFCF and household spending is encouraging as these are critical to supporting South Africa’s future economic performance.