It’s going to be a close call for South Africa
Economists say South Africa may have escaped a technical recession in the first quarter of the year, but the extreme volatility in the economic data being put out makes it difficult to call.
Economists from the Bureau for Economic Research (BER) and banking groups Nedbank and Absa say that mining and manufacturing output data this week will provide a clearer picture of how South Africa’s economy performed in the first quarter of the year.
Given the persistent load shedding hitting the country, expectations are that both sectors are likely to show a decline. However, with outages being less intense in March versus February, the figures may not be as bad as many expect.
According to Nedbank, production probably declined further in March, weighed down by load-shedding, subdued global demand and weaker commodity prices.
“Manufacturing production is forecast to have contracted by 6.1% yoy in March, worse than the 5.2% decline recorded in February. Mining production probably declined further, although the rate of contraction likely moderated, supported by a slight improvement in electricity supply in March and firmer demand from China,” it said.
This sentiment was echoed by Absa, which said that ongoing rotational power cuts, which intensify and abate unpredictably, have introduced a high degree of volatility in the high-frequency activity data, making these difficult to forecast.
“That said, we believe that the moderation in the intensity of load shedding in March to an average of stage 3 relative to an average of stage 4 in February likely supported some improvement in output in both mining and manufacturing,” it said.
In mining, Absa anticipates a partial output recovery of 2.2% m-o-m seasonally adjusted for March after the sharp drop of 4.9% in February. The bank forecasts that production in the manufacturing sector rose 0.9% m-o-m sa in March.
The group said that this translates to a contraction of 7.3% y/y (February: -5.0%) for mining and a decline of 10.1% y/y (February: -5.2%) for manufacturing.
“The release of these data will allow us to update our Q1 23 GDP tracking estimate, which currently sits at 0.9% q/q sa, ahead of our published forecast of 0.2%,” Absa said.
Close call
The BER’s assessment also shows it is a difficult call, but it remains confident that South Africa managed to edge out a technical recession in the first quarter of the year.
The group said that feeding this positive view is that the country’s trade balance came out better than expected in March, while Stats SA’s electricity generation data for the month was also better than expected.
South Africa recorded a surplus of R6.9 billion in March, following a downwardly revised R10.7 billion surplus in February. However, for the first quarter as a whole, the merchandise trade balance remained in deficit due to the large shortfall recorded in January, the BER noted.
“From a Q1 GDP standpoint, if we seasonally adjust the trade data and deflate it with our export and import price indices, it seems as though, in line with our expectation, net exports were less of a
drag on real GDP growth than was the case in 2022Q4.
“This is another tick to our long-standing view that the economy skirted a recession in 2023Q1,” the group said.
The view on Q1 GDP was further supported last week by Stats SA data showing a large 4% m-o-m increase in real electricity generation during March.
“To be clear, even with the recovery in March, electricity output was still down by 1.6% q-o-q, but this was a better outcome than previously expected.
“Moving back to February 2023 data, Stats SA reported that the utilisation of production capacity by large manufacturers was basically unchanged at 77.9% compared to 77.8% in February 2022,” it said.
Red flags for Q2
While South Africa may have managed to avoid a technical recession in the first quarter of the year, the country’s wider economic issues are far from resolved, and red flags are already emerging for the year’s second quarter.
The April batch of PMI data shows that the economy experienced a tough start to the second quarter amid intense load-shedding hurting output, and demand remaining under pressure, the BER said.
The Absa Manufacturing PMI rose to 49.8 in April from 48.1 in March, coming in below the 50-point neutral mark for a third consecutive month. A surge in the inventories index supported the headline index as business activity and new sales orders declined.
The pain extended beyond the manufacturing sector as the S&P Global South Africa PMI, which covers more sectors across the private sector, also remained in contractionary terrain. The PMI edged down to 49.6 in April from 49.7 in March. A decline in output was the primary drag as activity levels fell for the seventh time in the past eight months.
The April Naamsa new vehicles sales also disappointed, with overall sales declining by 0.2% y-o-y following a 0.6% drop in the previous month. While sales of light commercial bakkies and minibuses rose by an encouraging 11% y-o-y, this was not enough to offset a 6.1% decline in new passenger vehicle sales.
The export story is more positive, the BER said.
Depending on which analytical model you buy into, South Africa is still on track for a flat year of growth, with most forecasts pointing to zero to 0.5% growth for the year and a couple of lagged outliers pointing to closer to 1% or more.
Locally, the banks view the economy as flirting with recession, with most forecasts in the 0.1% to 0.3% range. The South African Reserve Bank forecasts just 0.2%. Globally, groups like the IMF put growth projections at 0.1%.
Load shedding remains the key drag, with the SARB indicating that rolling blackouts have wiped two percentage points from GDP expectations this year.
Blackouts are expected to intensify in the coming months as winter approaches, which will dull any hopes of growth in the second and third quarters of the year.
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