Dark clouds gather for South Africa

 ·21 Aug 2023

South Africa’s recovery is expected to hit a stumbling block in the third quarter of the year as weaker economic data trickles out amid disruptive sociopolitical events and civil unrest.

Despite internal trade data last week pointing to retail and wholesale businesses under pressure in the second quarter of the year, economists at the Bureau for Economic Research still anticipate overall real GDP showing growth for Q2.

This is largely thanks to more positive data elsewhere – such as the mining and manufacturing sector, as well as in energy generation, underpinned by lower-than-expected levels of load shedding over the period.

However, “the situation looks less rosy for the third quarter,” the BER said.

According to the economists, clouds started gathering quite heavily over the first half of Q3, which saw several adverse economic events take place that are likely to weigh on aggregate economic activity.

These include:

  • The torching of multiple trucks on the N3 transport corridor in July. The latest (July) Absa PMI figures, which revealed longer lead times and lower output, suggest that the resultant delays in the delivery of inputs were quite disruptive.

  • More intense load-shedding in July after a reprieve in June. Load shedding has been active on a near-permanent basis for almost a full year, with the cost to the economy amounting to the hundreds of billions of rands.

  • The damaging week-long taxi strike in the Western Cape, which resulted in high worker absenteeism in several sectors, including retail. While the strike has ended, tensions are still high as both parties dig in the heels on their respective positions.

  • Disruptions related to the ongoing municipal worker strike in Tshwane. Workers are demanding pay increases, while the city says it cannot afford them. This has resulted in illegal strikes along with violence, intimidation and heavy disruption to services.

  • Corporate earnings results that increasingly suggest domestic consumer income is being pinched by higher borrowing costs following 475bps worth of SA Reserve Bank (SARB) policy rate hikes since November 2021.

“While it is difficult to quantify the cumulative impact of these events, real GDP growth momentum is at best set to slow materially in the third quarter,” the group said.

Another development that does not bode well for domestic growth is the ongoing struggles in the Chinese economy, where the latest activity data was again underwhelming. In addition, there seems to be no end to the problems in the Chinese property market.

“This is in stark contrast to the US, where activity is pumping along,” the BER said.

Worries about the Chinese economy hurt commodity markets, which has a negative impact on countries like South Africa.

Inflation red flags

A key flag for the health of the economy and households will be the inflation data published later this week.

While the BER anticipates that headline inflation will again show a sizeable drop – possibly dipping to 4.7% – upward pressure is still being felt, particularly from the electricity sector.

Economists at Nedbank forecast average consumer prices to have increased by 1.3% mom in July, up from 0.2% in June, mainly pushed up by the seasonal price adjustments in some of the major categories.

The main driver of the monthly rise within ‘housing and utilities’ will be electricity tariffs. Municipalities have raised electricity tariffs by more than 18%, effective July.

However, headline consumer inflation is forecast to have continued to moderate.

“The slowdown mainly reflects the impact of the higher base established last year when Russia’s attack on Ukraine exacerbated supply chain disruptions and resulted in a surge in commodity prices. Consequently, inflation accelerated to 7.8% in July 2022, the highest since May 2009. Therefore, the deceleration in headline inflation in July will continue to be driven by fuel prices off a higher base,” Nedbank said.

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