Load shedding marching South Africa into recession

 ·6 Mar 2023

Deteriorating trading conditions exacerbated by severe load shedding in early 2023 may mean the economy entered a recession in the final quarter of 2022, says Nedbank.

In its latest Industry Insights, the bank reported that every single day of January, February and March to date has brought with it load shedding, with 79% of time spent at destructive stages between 3 and 6.

“Based on our calculations, real GDP is likely to shrink by a further 0.4% in Q1, which means that the economy probably entered a recession in the final quarter of last year,” Nedbank said.

“While load-shedding is mainly to blame, other downward pressure emanated from sticky inflation, exceptionally high food prices, and the sharp rise in interest rates.”

It forecasted that real GDP declined by 0.4% quarter-to-quarter in Q4, translating into a growth rate of 2.3% for the entire calendar year.

Two consecutive quarters of negative growth are indicative of a technical recession.

Official GDP results for Q4 2022 are expected from Statistics South Africa on Tuesday, 7 March 2023.

The bank said that over the fourth quarter of 2022, there were only two days without power outages. The hours per day without electricity increased by 51% of the period at load shedding stages between 3 and 6, it added.

“These paralysing disruptions hurt output and sales in all industries while driving up production costs across the board,” reported Nedbank.

“High-frequency indicators show that mining and manufacturing production were hardest hit, with output declining over the quarter. Elsewhere, the impact was less severe, but growth in services nonetheless slowed significantly over the quarter.”

The Bureau for Economic Research’s (BER) predictions for a fourth-quarter contraction last year align with Nedbank’s forecast. However, the BER has pencilled in a 0.5% contraction quarter-on-quarter.

“This is in line with the Bloomberg consensus forecast of -0.4%. From a sectoral perspective, high-frequency monthly data suggests that mining, electricity, and manufacturing output are set to contract on a quarterly basis,” the research firm said.

On 13 February, economists, according to Bloomberg, found that there is a 68% chance that the country will see a further recession in the next 12 months.

The polled group of six economists were far more adamant that a recession is on the horizon, with only 45% of them pointing to a recession in January.

The embattled national power utility is the primary driver for this negative sentiment.

A lack of reliable energy for business activities has also forced many analysts and economic institutions to revise their growth expectations.

In late January, the South African Reserve Bank (SARB) revised its GDP growth forecast from 1.1% to 0.3% year on year.

Nedbank has now revised its expected GDP growth for 2023 to 0.4%, which is a significant downward revision from 0.7% previously.

This prediction is, however, based on the assumption that Eskom, at least, manages to restrict load shedding to stages 3 and 4 on average from Q2 onwards, Nedbank said.

A domestic recession may align with a global recession. The BER said that short-term interest rates remain well above those for longer-term securities – a US recession is likely in the next 12 months.

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