Recession or no? What to expect from South Africa’s GDP data this week

Stats SA will publish South Africa’s gross domestic product (GDP) figures for the first quarter of 2023 this week, revealing whether the country has entered into a technical recession or not.

Following the shock GDP decline of 1.3% in the fourth quarter of 2022 amid record levels of load shedding and a significant downturn in economic activity, economists and analysts did not hold much hope for Q1 data.

This is because the quarter saw load shedding escalate even further amid a myriad of other economic issues – both related and unrelated to load shedding – add pressure.

However, as the months progressed, industry data started switching up the narrative, with sectors of the economy reporting surprisingly positive data. In a few short months, economists are now expecting the quarter to show marginal GDP growth – sparing the country from a technical recession.

According to economists at Nedbank, despite persistent power shortages, the economy performed slightly better than expected in Q1 2023.

Load shedding remains the ever-present thorn in the economy’s side, with the South African Reserve Bank noting that the near-permanent outages have likely wiped two whole percentage points off annual growth this year.

Over the first quarter, the economy enjoyed only one day without load-shedding. On top of this, the country spent 23 hours per day without electricity, with 83% of the time at load-shedding stages 3 and 6.

Eskom shed a staggering 7,891.6 GWH in Q1, significantly higher than the already shocking 6,021.4 GWH in Q4 2022. The over 7,000 GWH shed can be broken down into:

• 3.6 days of stage 1
• 6.6 days of stage 2
• 20.3 days of stage 3
• 33.5 days of stage 4
• 7.9 days of stage 5
• 13 days of stage 6

“Despite these disruptions, output and sales in most industries managed to grow,” Nedbank said. The exceptions were construction, vehicle sales, and accommodation.

“Higher interest rates and fading confidence hit construction and vehicle sales. Accommodation always tends to dip in the first quarter of every year as the holiday season ends. The better-than-expected growth outcomes point to some resilience in adverse circumstances,” it said.

This resilience came at an enormous cost, however, with companies incurring much higher input costs to secure electricity by running generators for extended hours or installing renewable generation capacity.

“Worst of all, companies incurred these enormous additional expenses just to keep their doors open for business,” the bank said.

Given the economic data available, however, Nedbank has increased its Q1 GDP growth forecast from a flat 0% to marginal growth of 0.3% quarter on quarter.

However, as with most economic data, this position does not come without its caveats.

Firstly, it should be noted that Q4 2022’s data caught markets by surprise. While markets anticipated a decline in GDP over the quarter, the final figure was more than double what was expected (-0.6% vs -1.3%). This means that there are huge downside risks to the GDP data coming this week.

In addition to this, even if South Africa managed to grow the economy in arguably some of the worst economic conditions it has faced (outside of Covid), it does not mean that the country is in the clear.

According to Nedbank, the outlook for the rest of the year remains bleak.

“Load-shedding worsened at the start of Q2. The economy endured power outages every single day in April and May, with more than half of the time spent at stages 4 to 6. Based on our calculations, real GDP will likely shrink by about 0.1% in Q2,” it said.

While industry appears to be adapting to load-shedding, it has driven up production costs dramatically, eroding profitability in most sectors. Surging input costs, in turn, have kept inflation elevated, pushing interest rates up by more than would otherwise be necessary, the bank said.

“The power crisis, other logistical constraints, weaker global demand, and lower international commodity prices will continue to undermine production in the primary and secondary
sectors.

“At the same time, the growing strain on household incomes from high inflation, particularly on essentials, and rising interest rates will weigh down on consumer confidence and demand, capping the upside for the services.”

The bank’s sector review shows that risks to growth across all industries is to the downside, with the exception of Electricity, gas & water (balanced) and General government (upside, thanks to wage increases).

Given the pressured outlook for the rest of 2023 – with perhaps some light at the end of the tunnel in Q4, Nedbank expects South Africa to sit closer to a full-year recession than previously expected.

Overall, the bank expects GDP growth to slow to a meagre 0.1% in 2023, down from 2% in 2022.

On the upside, things should improve significantly in 2024, it said.

“We still see a modest cyclical recovery from 2024 onwards, with growth averaging around 1.2% over the next three years.

“Falling inflation and lower interest rates, both domestically and globally, will likely boost demand. However, much still depends on whether private companies can shift more aggressively to alternative energy and Eskom can reduce load-shedding significantly,” it said.

Read: It’s time for a recovery in South Africa’s crushed markets