South Africa’s economic devil is in the details
While South Africa’s recent tranche of economic data appears to signal positive signs for the country, they are a poor reflection of the actual underlying strain South Africa’s economy faces, says Nedbank.
The bank’s latest GDP Tracker report showed better-than-expected month-on-month outcomes for most industries, including mining, manufacturing, electricity, wholesale, retail and more.
However, despite the positive signs resulting in an upward revision to the country’s first-quarter GDP forecasts, downward revisions in sectors with more impact on GDP indicate that there will not be a quick turnaround in growth.
One positive to emerge from this illusion is that the bank now forecasts 0.2% growth for the first quarter of this year, up from the prior -0.4%, thereby averting a technical recession.
Nedbank said: “Although most of the data points in January showed significant improvements, resulting in an upward revision to our Q1 forecasts and avoiding a technical recession, the existence of multiple hindrances on both the supply and demand sides of the economy hinders the possibility of a firm turnaround in growth.”
It added that on the supply side, Eskom’s inability to keep the lights on and operational difficulties at the national logistics company Transnet are significant structural constraints to the country’s crippling production outcomes, business sentiment and investment prospects.
Nedbank said that when looking closer at the recent data provided by Stats SA, the fact that there was a month-on-month bounce of improvements; activity in most industries was still down significantly from a year ago, and many were improving from a severely low base.
The table below shows the month-on-month percentage change for key industries as well as the year-on-year change:
Nedbank provides the following examples of underlying economic conditions remaining weak despite stronger month-on-month results:
Mining production
There was a robust 4.4% month-on-month increase in mining production, marking the second consecutive month of gains; however, according to Nedbank, the sector showed 12 months of consecutive contractions measured year-on-year.
Manufacturing production
There was a 1.1% month-on-month improvement in manufacturing production, marking the third increase in three months. This was boosted by increased output in key goods, including petroleum, rubber and chemicals.
Nedbank noted, however, that production actually declined for the third consecutive month by 3.7% when measured year-on-year.
Electricity production
“Stats SA reported an improvement in electricity production over the month. The non-seasonally adjusted data shows that Eskom’s electricity production edged up by 3.3% m-o-m off December’s extremely low base but remained dangerously low, hovering near the 20-year lows hit in the middle of level 5 lockdown in April 2020,” said Nedbank.
Nedbank said that the 1.3% increase in electricity production seems counterintuitive amid heavy-load shedding during January.
The bank added that the physical volume of electricity production dropped by an additional 8% after falling by 8.3% and 1.8% in December and November, respectively.
Retail and wholesale sales
From a monthly perspective, Stats SA reported that retail and wholesale trade sales grew by a strong 1.5% and 0.4%, respectively.
However, wholesale sales declined for the 4th consecutive month by 3.6% year-on-year, while retail sales contracted by 0.8% year-on-year.
“Viewed over the longer term, wholesale and retail sales have been drifting sideways around 2019 levels for the past two and a half years. A sustainable upward break from these levels will require faster job-creating economic growth.”
The truth
South Africa still faces an uphill battle to bring about a turnaround in the country’s growth trajectory, said Nedbank.
“Even if the mammoth task of addressing the challenges starts in earnest, the problems are unlikely to be resolved in the short run. Industry will also continue facing weak demand from both the domestic and global markets on account of high-interest rates and sticky prices, which are affecting consumer finances and, amongst other things, sentiment,” said the bank.
The most notable hindrances are primarily from the supply side, Eskom’s inability to keep the lights on, a Transnet’s operational difficulties.
Regarding Eskom, Nedbank said that despite plans in place to address the energy crisis, with the institution of a national state of disaster and an energy plan- the crisis is unlikely to be resolved in the near term.
The bank added that Transnet remains a prominent hindrance to key industries, primarily mining and indirectly manufacturing.
“Challenges surrounding transport and logistics have resulted in significant losses in export volumes. The South African Minerals Council has estimated that the sector lost R35 billion worth of exports in 2021 and R50 billion in 2022,” said Nedbank.
To resolve such issues, Nedabnk said that capital investment in physical infrastructure for both the energy and transport sectors is needed in addition to new investment and policy changes to facilitate industry competitiveness on both a regional and international basis.
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