Good news for South Africa’s economy

Despite a few major sectors dragging on the economy for the year’s second quarter, data is still pointing to a quarter of GDP growth, which will spare South Africa from technical recession.

The latest data on industrial production for Q2 came out at 0.4% growth qqsa (quarter on quarter, seasonally adjusted), which was in line with market forecasts of around 0.5%.

Industrial production constitutes manufacturing, mining and electricity production.

According to Investec chief economist Annabel Bishop, industrial production has proved to have a directional relationship with GDP, “although it tends to run faster than GDP in either expanding or contracting”.

“Industrial production data has a close relationship with GDP, and a 0.4% qqsa expansion in industrial production will herald a positive expansion in GDP in Q2, while a number of other incoming data readings for Q2 reflect GDP growth,” Bishop said.

“Nevertheless the positive value supports our view GDP will not contract in the second quarter,” she said.

Other economic data is also supportive of this view.

Economic transactions rose by 1.7% q/q in Q2 in the BankservAfrica’s Economic Transactions Index, which captures the value of economic transactions via bank payments in the digital economy.

Q2 retail sales grew 1.5% qqsa, and wholesales trade data, also out today, showed a 0.9% qqsa increase for Q2, adding to the likelihood of a positive GDP outcome for the past quarter, as trade was likely boosted by improved confidence postSouth Africa’s national election, Bishop said.

Electricity production was up a notable 1.3% qqsa, as the quarter proved free of load shedding, while production improved as maintenance and repairs ramped up.

Eskom has now recorded over 140 days of constant energy supply and a R9.59 billion reduction in diesel expenditure y/y, as the utility is not resorting to diesel generators to improve electricity production but instead increased plant capacity.

Eskom’s average Energy Availability Factor (EAF), or available electricity generation capacity, is at 68% in the latest data so far for August, while over July Eskom achieved an EAF of 67.41%, returning to 2021’s ratios.

This occurred as Eskom’s diesel consumption remained significantly below its projected figures for winter.

Bishop noted that, while the production of electricity has improved in South Africa, insufficient rail and port capacity are still holding back faster growth, particularly for the mining sector seeking to export bulk commodities, and for bulk agriculture commodities.

While there are positive driving GDP growth, there are also problem areas.

Q2 aw mining production contract by -0.9% qqsa, which reflects the weak global environment constrained by restrictive monetary policy, particularly in the US, while South Africa has seen its monetary policy tightening as inflation has fallen.

“The publication of motor vehicle trade sector data, also published today, showed a -0.5% qqsa contraction in Q2, with a marked contraction in real vehicle sales, as consumers continued to experience a restrictive interest rate environment,” Bishop noted.

New building completions lifted 7.3% qqsa in Q2—but this came off a low statistical base, with Q1 seeing a -29.9% qqsa contraction.

However, the economist noted that prospects for these sectors look better going forward.

Stronger demand for commodities, and so higher prices, are expected as the US interest rate cut cycle becomes entrenched, which will boost mining.

“But the sector is chiefly hindered by structural deficiencies, particularly transport and regulations,” she said.

The US interest rate-cutting cycle is expected to kick off from September, with the South African Reserve Bank also expected to make its first cut that month.

Cutting interest rates will bring relief to South African households, which will go a long way to boosting consumer expenditure, also aiding a recovery in GDP.

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