Load shedding is marching South Africa straight to technical recession: Absa

 ·31 Oct 2022

South Africa’s power situation is getting worse as breakdowns of Eskom’s generation fleet multiply – and the economy is taking severe strain, as a result, say economists at Absa.

This is marching South Africa to another quarter of economic decline in Q3 2022, they said, which would put the country in a technical recession following the load-shedding-driven decline in the second quarter of the year.

Absa calculated a loss of 3,691GWh of electricity supply in the third quarter, resulting in the worst quarter of rolling blackouts on record.

While the economic impact of this is difficult to calculate due to the complexity and overlappings in the market, the bank estimates that 1 percentage point of GDP growth has been wiped from the quarter and that it could lead to a cut of 1.3pp to GDP for the year.

“Unfortunately, without adding substantial new generating capacity, a quick turnaround in this growth-dampening situation seems unlikely,” it said. “Consequently, we see regular bouts of cuts continuing into 2024, with further negative consequences for growth.”

High-frequency data from some of the most energy-intensive sectors provide clues about the effects of the ongoing power cuts on economic activity, Absa said.

“For instance, production in the mining and manufacturing sector rebounded fairly quickly post the pandemic hard lockdowns and was close to pre-pandemic levels by early 2021. However, there has been no growth since then.

“In fact, total manufacturing output in August 2022 was down 5.6% compared with that in March 2021, with most manufacturing sub-sectors recording lower output.”

Similarly, the aggregate level of mining output in August 2022 was down 8.4% compared with that in March 2021, and down 12.2% from the surprisingly high base in April 2021.

Production trends have also been highly volatile through this period, the bank said.

“It is worth pointing out that strikes and floods have also been drags on economic activity, but we believe load shedding is responsible for a big part of the underperformance,” it said.

Absa said that South African businesses have become more adept at dealing with lower stages of load shedding and that the economy, in general, has become less energy-intensive over time, with structural shift towards services.

However, because load shedding is happening at short notice, and stages are escalating and becoming more frequent, the damage being done is increasing and leaving less time for businesses to be productive.

“We believe that the amount of output lost during the day…stage 6 load shedding over a given period could be much higher than the three times of output lost during stage 2 load shedding over the same period.

“It is difficult to assess the cumulative damage to the economy’s growth potential from past investment lost to persistent power shortages – we believe this is arguably the most significant, hard-to-quantify impact of load shedding on South African growth over the long run,” it said.

In line with the South African Reserve Bank, Absa’s modelling estimates that 1 percentage point has been shaved off of Q3 production due to rolling blackouts.

This pushes the projections for the quarter to a decline of 0.4%. This would follow a decline of 0.7% in the second quarter, pushing the country into a technical recession.

“Assuming that load shedding eases in Q4 22 to roughly the level in Q1 22, we estimate that power cuts will have knocked 1.3pp off the final full-year 2022 GDP growth rate,” the bank said.

Read: The goalpost to end load shedding in South Africa just shifted – and we’re running out of time

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