Recession or not? What to expect from South Africa’s GDP data

Aiden Ayanda

Global Courant

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

After the shocking 1.3% drop in GDP in the fourth quarter of 2022, amid record levels of tax cuts and a significant downturn in economic activity, economists and analysts were not holding out much hope for the first quarter numbers.

This is because the shutdown escalated even further in the quarter amid a host of other economic issues – both related and unrelated to the shutdown – which added to the pressure.

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However, as the months progressed, sector data began to change the story, with sectors of the economy reporting surprisingly positive data. In a few months, economists now expect the quarter to see marginal GDP growth, sparing the country a technical recession.

According to Nedbank economists, the economy performed slightly better than expected in the first quarter of 2023 despite ongoing power shortages.

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

During the first quarter, the economy experienced only one day without tax. In addition, the country was without electricity for 23 hours a day, with 83% of the time in phases 3 and 6 of the load shedding.

Eskom lost a whopping 7,891.6 GWH in Q1, significantly higher than the already shocking 6,021.4 GWH in Q4 2022. The more than 7,000 GWH storage can be broken down into:

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

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

“Higher interest rates and declining confidence have had a negative impact on construction and auto sales. Lodging always tends to drop in the first quarter of each year as the holiday season ends. The better-than-expected growth results indicate some resilience in adverse conditions,” the company said.

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However, this resilience came at a huge cost, as companies had to incur much higher input costs to secure electricity by running generators for extended hours or by installing renewable generation capacity.

“Worst of all, businesses have incurred these huge additional costs to keep their doors open for business,” the bank said.

However, given the available economic data, Nedbank has raised its Q1 Q1 growth forecast from flat 0% to marginal growth of 0.3% quarter on quarter.

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

First, it should be noted that the data from the fourth quarter of 2022 surprised the markets. While markets expected a decline in GDP during the quarter, the final figure was more than double what was expected (-0.6% versus -1.3%). This means there are huge downside risks to the GDP data coming this week.

Furthermore, even if South Africa managed to grow its economy in arguably some of the worst economic conditions it has faced (outside of Covid), it doesn’t mean the country is free.

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

“Load shedding deteriorated at the start of Q2. The economy experienced power outages every day in April and May, with more than half of the time spent in phases 4 to 6. Based on our calculations, real GDP is likely to contract by about 0.1% in the second quarter the report said.

While the industry appears to be adjusting to the removal of the tax, it has dramatically increased production costs, hurting profitability in most industries. Rising input costs, in turn, have kept inflation high, driving interest rates higher than they would otherwise need to, the bank said.

“The energy 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, increasing pressures on household income from high inflation, especially for essentials, and rising interest rates will weigh on consumer confidence and demand, limiting the benefit to services.”

The bank’s sector inquiry shows that risks to growth are on the downside in all sectors, with the exception of electricity, gas and water (balanced) and government (upside, thanks to wage increases).

Given the pressured outlook for the remainder of 2023 – with perhaps some light at the end of the tunnel in the fourth quarter – Nedbank expects South Africa to move closer to full-year recession than previously anticipated.

Overall, the bank expects GDP growth to slow to a mere 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 economic recovery from 2024, with an average growth of about 1.2% over the next three years.

“Declining inflation and lower interest rates, both domestically and globally, are likely to boost demand. However, much still depends on whether private companies can switch more aggressively to alternative energy and whether Eskom can significantly reduce divestment,” the company said.

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

Recession or not? What to expect from South Africa’s GDP data

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