South Africa’s economy is back to where it was before Covid – but citizens are becoming poorer

 ·8 Jun 2022

South Africa’s economy is back at the size it was before the coronavirus pandemic struck, following quicker than anticipated growth in the first quarter.

The country’s gross domestic product (GDP) increased by 1.9% in the first quarter of 2022, noted statistician general Risenga Maluleke on Tuesday (7 June), adding that in the first three months of the year, the manufacturing industry increased by 4.9%, contributing 0.6 of a percentage point to GDP growth.

“Seven of the 10 manufacturing divisions reported positive growth rates in the first quarter. The petroleum, chemical products, rubber and plastic products division made the largest contribution to the increase in the first quarter.”

The median of 13 economists’ estimates in a Bloomberg survey was for growth of 1.2%. The economy grew 3% from a year earlier.

At R1.15 trillion in the three months through March, GDP is now about R5 billion more than it was in the first quarter of 2020, Bloomberg reported, citing statistics agency data.

Still, Bloomberg said that the country’s economy is trapped in a downward spiral and hasn’t grown by more than 3% annually since 2012. “Policy paralysis, weak business sentiment and high levels of crime continue to weigh on fixed investment spending, with companies wary of committing large sums of money to domestic projects,” it said.

The International Monetary Fund (IMF) warned in a note on Tuesday (7 June) that South Africa’s economy should be benefitting from a commodity price boom – but instead, it is frozen in a low-growth climate due to slow reform and policy integration from the government, and persistent problems with state-owned companies.

FNB senior economist, Thanda Sithole, said that as expected, quarterly growth was underpinned mainly by the manufacturing sector. “The biggest surprise relative to our forecast largely emanated from the finance, real estate and business service, general government service and personal services sectors,” the economist said.

Meanwhile, household consumption expenditure remained relatively resilient, increasing by 1.4% q/q, albeit slower than the 3.0% q/q in 4Q21. Compensation of employees (non-seasonally adjusted) was up by 5.5% y/y in 1Q22, reflecting a continued expansion in wages following the upwardly revised 5.2% y/y (previously 4.4% y/y) recorded in 4Q21.

FNB said that further wage growth in excess of 4.5% – including the quarterly net job gains in 1Q22  could further support the South African Reserve Bank’s (SARB) repo rate hiking cycle and support its forecast of a terminal repo rate of 5.75% by year-end 2022.

Overall, the data showed that real GDP is now about 0.5% above the pre-pandemic 4Q19 level, indicating a faster recovery than initially envisaged, said Sithole.

Household consumption expenditure grew by 1.4% q/q following 3.0% q/q in 4Q21, reflecting strong growth contributions from spending on food and non-alcoholic beverages (2.5% q/q, 0.4ppt), transport (2.8% q/q, 0.4ppt) and restaurants and hotels (6.5% q/q, 0.2ppt).

Outlook: load-shedding and the war in Ukraine

FNB said it has adjusted its 2022 growth forecast slightly higher to 1.9% from 1.7%, and will closely monitor some of the prevailing key risks. “Growth is expected to settle at 1.6% and 1.5% in 2023 and 2024. The cumulative impact of incremental structural reforms in the outer years could ultimately boost growth.”

However, medium-term global growth outcomes, including the overall risk of geopolitical tensions, will be critical for medium-term growth prognosis, said Sithole.

“While 1Q22 growth is encouraging, we are concerned about growth outcomes in 2Q22 amid the impact of the KZN floods, load-shedding, China’s zero-Covid policy, and the impact of higher domestic inflation on consumer purchasing power.”

Sanisha Packirisamy, an economist at Momentum, said that growth momentum should moderate in the second quarter as extensive flood damage in KwaZulu-Natal and a higher incidence of load shedding curbed economic activity.

Packirisamy said that six out of the 10 South African industries are still operating below pre-pandemic levels.

Real growth in the economy averaged a pedestrian 0.5% for the past five years and 1% for the last decade, which is significantly below the average rate of growth in the SA population (0.5%) for the same period. “This suggests that citizens are becoming poorer on average,” said the economist.

“In our view, higher global inflation eroding demand, aggressive lockdowns in China, an unwinding of accommodative monetary policy, fiscal consolidation, structurally high unemployment and local energy supply shortages continue to raise notable downside risks to local growth.

“We expect growth to average 1.8% in 2022 and 2023. This is line with the May 2022 Reuters Econometer poll and broadly in line with the SA Reserve Bank’s projections of 1.7% and 1.9%, respectively,” said Packirisamy.

Citadel chief economist, Maarten Ackerman, said it will take consistent quarter-on-quarter growth over the next while for the country to make significant strides in alleviating South Africa’s growing poverty and record levels of unemployment.

“GDP printed much stronger than expected which, in rand terms, has significantly bolstered us back to where we were prior to the pandemic, so we have finally recovered the economic loss as a result of Covid-19,” said Ackerman.

“Although it’s good to see recovery, one must bear in mind that this still leaves South Africa with almost three years of no real growth, a situation that has exacerbated the country’s social issues, he said. “Although the unemployment rate recently dropped to 34.5%, we cannot deny that urgent intervention to create jobs and drive entrepreneurship is still required.”

Looking at where South Africa’s growth came from, the past quarter’s top-performing industries were manufacturing; trade, catering and accommodation; electricity, gas and water; and transport, storage and communication.

The country also saw very healthy consumer spending in the first quarter of 2022, said Ackerman. “We saw consumers supporting the service economy. The economy was greatly boosted by huge increases in spending on restaurants and hotels, transport, food and non-alcoholic beverages, as well as communication. Many services benefited from the economy being fully opened.”

Ackerman pointed out that it was encouraging to see the economy making a full recovery, after the pandemic slump. “To grow from here, the country needs to focus all its efforts on reforms to ensure sustainable growth to make inroads in addressing the social needs of the majority of South Africans.”

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