South Africa is in trouble

 ·13 Mar 2023

Whether South Africa is pushed into a full recession in 2023 or not, the country’s economy is in trouble, say economists at the Bureau for Economic Research (BER).

The country was hit with a barrage of bad news last week – starting with a lacklustre cabinet reshuffle, moving on to a nasty surprise in the quarterly GDP figures, and ending with a credit rating outlook shift from S&P Global.

While these were the main low-lights of the week, other bad news was mixed in – business confidence took a hit, and South Africa’s current account balance reverted to a calendar year deficit for the first time in three years during 2022.

However, the biggest indicator of South Africa’s economic troubles is the GDP data, which came in three times worse than expected. While market consensus expected South Africa’s Q4 data to show a contraction of 0.4% for the period, the final figure came in at -1.3%.

Seven out of the ten major sectors shrank in the last three months of 2022. In terms of the large quarterly GDP decline, the biggest drag came from the finance sector – down by 2.3% and shaving off 0.6% pts – due to lower fee income in the commercial banking sector, lower value added in the insurance sector and reduced volumes of bond and financial derivatives trading.

“In terms of the demand side of GDP, exports made the biggest negative contribution to real GDP in Q4 (-1.4% pts), in part due to logistical constraints caused by the more than ten-day Transnet strike during October,” the BER said.

“Persistent power outages also took a heavy toll on industrial activity in 2022Q4 with over half of Q4’s load-shedding at stage 3 and above,” it said.

The shock GDP data threw up red flags for a recession in South Africa, with most commentary feeding the line that the country has already hit the point of a technical recession thanks to persistent high-stage load shedding every single day since the start of the year, pointing to another quarter of decline in Q1 2023.

“Given even more intense load-shedding so far in 2023Q1 relative to 2022Q4, South Africa is in a technical recession,” the BER said, adding that pressure on the economy is mounting.

This was highlighted by the RMB/BER Business Confidence Index (BCI) falling for the fourth consecutive quarter to a two-year low of 36 in 2023Q1 from 38 in 2022Q4, with most industries expressing pessimism towards growth prospects.

Rating agency S&P Global was also quick to react to the data, cutting the outlook on South Africa’s BB- sovereign credit rating to stable from positive.

“On the heels of SA’s recent greylisting – which S&P said had no bearing on its decision – the outlook cut is another dent to investor confidence in South Africa,” the BER said.

Long term recession?

A technical recession for South Africa spells bad news for the longer-term GDP growth outlook.

Following the data released last week, most banks cut their 2023 GDP forecast to below 0.5%, more closely matching the South African Reserve Bank’s forecast of 0.3%. None have yet called a full-year decline, however.

The BER is also not yet forecasting a full year decline, saying that hope still exists that the country could avoid even a technical recession.

“A ramp-up of green energy investment is one factor that argues against a technical recession. In addition, although the sectors most exposed to the increased intensity of load-shedding may contract again in 2023Q1, we do not see the finance sector repeating the large Q4 decline,” it said.

“Measured from the demand side, besides the Transnet strike, exports in Q4 were adversely impacted by a coal train derailment in November. Presumably, these events will not be repeated, implying that exports could recoup at least some of the Q4 decline in Q1.”

“It is likely to be touch and go, but at this stage, we are not pencilling in another overall GDP contraction in 2023Q1,” the group said.

As for the risk of a credit rating downgrade, this is also not likely at this stage.

“Although the outlook downgrade from S&P Global is not good news, there remains no imminent risk of an outright downgrade of the credit rating,” the BER said.

Despite this bit of hopeful context, the BER said that real GDP growth in 2023 is projected to slow materially to roughly 0.0%-0.5%.

The economists also warned against getting bogged down in the technicalities of a technical recession, saying that “whether we see two consecutive quarters of declining GDP or not, the economy is under a lot of strain”.

Read: All signs point to recession

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