Don’t pop the champagne just yet, economists warn

 ·7 Jun 2023

South Africa narrowly avoided entering a technical recession in the first quarter of the year, despite record levels of load shedding and households under ever-increasing strain.

While any sign of economic growth under the current conditions is cause for celebration, economists have warned that the uptick will likely be short-lived, with economic pressure lying ahead.

Others have argued that, technical recession or not, the country is already in recession when looking at GDP on a per capita basis.

Stats SA published the latest GDP figures for the first quarter of 2023, showing surprising growth across most sectors of the economy.

The growth number was largely expected by the market and analysts, given early indicators that the economy proved to be more resilient than first thought, but it may have come as a surprise to consumers who have had to weather a barrage of bad news for much of 2023.

On top of 2023 being the worst year for load shedding on record, consumers have also faced stubbornly high inflation, escalating interest rates, as well as an increasingly burdensome cost of living driven by higher rates, fuel prices and other costs.

According to economists at Nedbank, because these factors are still very much in play, the modest bounce in Q1 GDP is likely short-lived, with Q2 data not lining up to be as peachy.

“Load-shedding intensified into Q2, weighing on confidence, disrupting operations, driving up production costs and eroding profits and income. These pressures, combined with the downturn in global growth and commodity prices, will hurt production and exports even further in the quarters ahead,” the bank said.

“The drag emanating from the country’s negative external position will likely intensify, with exports falling short of imports. Growth in consumer spending is also expected to slow due to the squeeze on household incomes emanating from sticky inflation and sharply higher interest rates.”

The bank said that government spending would probably increase further, reflecting higher-than-expected outlays on public sector wages. At the same time, the recovery in fixed investment is forecast to stall as growth prospects wane and risk perceptions worsen.

“We forecast GDP growth of only 0.1% in 2023, with the risks to our forecasts remaining on the downside,” it said.

This position was echoed by PPS Investments, which said that economic growth is expected to remain under pressure from load shedding, which continues to be a major constraint on business activity and sentiment in general.

“The second and third quarters are expected to be particularly challenging given increased winter electricity demand, alongside severely constrained supply,” it said.

Reza Hendrickse, Portfolio Manager at PPS Investments, said that while South Africa has avoided a technical recession – “for now” –  the group isn’t positioning its portfolios to be more optimistic any time soon.

“Our portfolio positioning currently reflects this dim economic outlook by being conservatively positioned in South African growth assets. However, this view needs to be weighed against attractive equity market valuations, which are currently already pricing in a very challenging environment,” Hendrickse said.

Households already in recession

Citadel’s Chief Economist, Maarten Ackerman, has taken a more sober view, saying that although a few key industries delivered some hope of resilience in the first quarter of 2023, the South African economy continues to take severe local and international strain as the world is likely to enter a recession.

He warned that South Africa’s economy is already in a recessionary environment due to all the headwinds it is facing.

The economy grew by only about 0.2% in the past year, putting pressure on social support, and Citadel’s analysts foresee a low growth rate, of less than 0.3%, for the rest of the year.

“Population growth is outstripping economic growth and, to my mind, that means we are already in a per capita recession,” Ackerman said.

South Africa’s most pertinent challenges, including record high load shedding, over-budget wage demands from trade unions and the battered rand, are putting “enormous strain on South Africa’s fiscal framework”, the economist said.

Increasing gross fixed capital formation, for the sixth quarter in a row, remained a “beacon of hope” and a sign of private and public sector investment into the economy, including more renewable energy and residential and commercial construction.

Consumers are however feeling the pinch.

“On the back of a poor global economic outlook and serious structural issues hampering growth in the country, South African consumers are finding themselves under severe pressure. The average South African is facing lower take-home pay, high unemployment – the third highest in the world – high inflation, and rapidly increasing interest rates counter to the rest of the world.”

Another view

According to Adriaan Pask, CIO at PSG Wealth, the outlook could be more favourable, arguing that low economic growth and political risks are already priced into very depressed valuation levels in large portions of the local market.

“Our outlook for local equities, therefore, remains favourable,” he said, adding that local investors or advisors should hold onto a long-term view and not simply the months ahead.

In that vein, things in South Africa are expected to improve.

While economic growth prospects for 2023 are dim due to the ongoing load shedding crisis, economists at the Bureau for Economic Research (BER) anticipate a much better fourth quarter of the year, where more generating capacity is expected to return, and new capacity will come online.

Crucially, the pipeline for new private sector energy generation projects tracked by Operation Vulindlela’s Embedded Generation Task Team has jumped from roughly 4,000 MW in March 2022 to a combined capacity of 10,000 MW.

There are 108 projects involved with a combined expected fixed investment requirement of over R200 billion.

In a positive for South Africa’s immediate energy needs, 3,000 MW is expected to be online next year, equating to roughly three stages of load shedding.

In addition, the BER added that Eskom should return several major generating units from long-term outages by late-2023 or early-2024.

This means that South Africa’s energy crisis could improve dramatically in 2024.

“Therefore, we are cautious not to extrapolate the current very poor domestic business conditions into 2024. Although slow going, there seems to be more progress being made behind the scenes to alleviate the debilitating power constraint than is generally appreciated,” the BER said.


Read: South Africa dodges technical recession – despite record load shedding

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