It will be a close call for South Africa

John Johnson
John Johnson

Global Courant 2023-05-08 12:57:24

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 released makes it difficult to call.

Economists from the Bureau for Economic Research (BER) and banking groups Nedbank and Absa say mining and manufacturing output data this week will provide a clearer picture of how the South African economy performed in the first quarter of the year.

Given the continued tax cuts hitting the country, it is expected that both sectors are likely to show a decline. Since the March outage is less intense than February, the numbers may not be as bad as many expect.

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According to Nedbank, production is likely to have continued to decline in March due to layoffs, weak global demand and weaker commodity prices.

“Industrial production is expected to have contracted 6.1% yoy in March, worse than the 5.2% decline in February. Mining production is likely to fall further, although the rate of contraction is likely to slow, supported by a slight improvement in electricity supplies in March and stronger demand from China.

This sentiment was echoed by Absa, who said persistent power outages, which unpredictably intensify and subside, have created a high degree of volatility in the high-frequency activity data, making it difficult to predict.

“That being said, we believe that the moderation in the intensity of the divestiture in March to a Stage 3 average from a Stage 4 average in February is likely to have led to some improvement in output in both mining and manufacturing. supported,” the company said.

In mining, Absa expects a partial production recovery of 2.2% mom seasonally adjusted for March, after the sharp fall of 4.9% in February. The bank forecasts that manufacturing output rose 0.9% mom sa in March.

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The group said this translates into a contraction of 7.3% y/y (February: -5.0%) for mining and a decline of 10.1% y/y (February: -5.2%) for production.

“The release of this data allows us to update our Q1 23 GDP tracking estimate, which currently stands at 0.9% q/q sa, ahead of our published forecast of 0.2%,” Absa said.


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The BER’s assessment also shows that it is a difficult choice, but it remains confident that South Africa managed to overcome a technical recession in the first quarter of the year.

The group said this positive view was fueled by the fact that the country’s trade balance came in better than expected in March, while Stats SA’s electricity generation data for the month also came in better than expected.

South Africa posted a surplus of R6.9 billion in March, following a downwardly revised surplus of R10.7 billion in February. However, for the first quarter as a whole, the goods trade balance remained in deficit due to the large deficit recorded in January, the BER noted.

“From a Q1 GDP standpoint, if we adjust trade data for seasonality and deflate it with our export and import price indices, it would appear that, consistent with our expectation, net exports were less significant.
drag on real GDP growth than was the case in 2022Q4.

“This is another sign of our long-standing view that the economy has evaded a recession in 2023Q1,” the group said.

The view on Q1 GDP was further supported last week by data from Stats SA showing a large 4% mom increase in real electricity generation in March.

“To be clear, even with the recovery in March, electricity production was still down 1.6% qoq, but this was a better result than previously expected.

“Going back to February 2023 data, Stats SA reported that manufacturing capacity utilization rates by major manufacturers were essentially 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 problems are far from resolved and red flags are already appearing for the second quarter of the year.

The April PMI dataset shows that the economy got off to a rocky start in the second quarter amid an intense tax cut that hurt manufacturing, and demand remained under pressure, the BER said.

The Absa Manufacturing PMI rose from 48.1 in March to 49.8 in April, falling below the neutral 50-point mark for the third consecutive month. An increase in the inventory index supported the headline index as business activity and new sales orders slowed.

The pain extended beyond the manufacturing sector as S&P Global South Africa’s PMI, which covers more sectors in the private sector, also remained in contracting territory. The PMI fell from 49.7 in March to 49.6 in April. A fall in production was the main drag, as activity levels fell for the seventh time in the past eight months.

Naamsa’s new vehicle sales in April also disappointed, with total sales down 0.2% year-on-year after falling 0.6% in the previous month. While sales of light commercial bakkies and minibuses rose an encouraging 11% yoy, this was not enough to offset a 6.1% drop in new passenger car sales.

The export story is more positive, according to the BER.

Depending on the analytical model you choose, 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 few delayed outliers pointing to closer at 1% or more.

Locally, banks view the economy as flirting with a recession, with most forecasts between 0.1% and 0.3%. The South African Reserve Bank forecasts only 0.2%. Globally, groups such as the IMF estimate growth forecasts at 0.1%.

Load shedding remains the main drag, with the SARB indicating that rolling blackouts have wiped out two percentage points of GDP expectations this year.

Blackouts are expected to increase in the coming months as winter approaches, dampening any hopes for growth in the second and third quarters of the year.

Read: Eskom moves tax separation back to stage 6

It will be a close call for South Africa

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