South Africa still at risk of recession

[Nat Quinn]

The South African economy may still enter a recession in the third and fourth quarters if the government does not tackle the structural constraints limiting economic growth.

StatsSA recently revealed that South Africa’s gross domestic product (GDP) increased by 0.6% in the second quarter of 2023.

This is higher compared to the first quarter growth of 0.4%, which followed the shock GDP decline of 1.3% in the fourth quarter of 2022 amid record load-shedding levels.

Manufacturing was the largest contributor to this quarter’s growth, growing by 2.2%, although Agriculture, Forestry, and Fishing was the fastest-growing industry.

The manufacturing sector’s strong performance surprised Efficient Group chief economist Dawie Roodt, who spoke to eNCA about the country’s economy.

However, given its importance in the South African economy, Roodt is concerned by the mining sector’s performance.

Despite the country’s marginal growth, South African consumers are still under severe pressure, indicating that the economy may contract in 2023.

Household consumption declined by 0.3% in the second quarter. “It is very clear that despite a slight uptick in economic activity, households are still under tremendous pressure,” Roodt said.

The negative impact of declining household spending will be compounded by the elevated levels of load-shedding the country is currently experiencing.

In particular, this will hit the manufacturing sector hard in the third quarter if load-shedding remains elevated. However, the industry has proven itself to be more resilient than expected.

“It is certainly possible that the economy could dip into a recession in the third and fourth quarters of the year. The reality is that the economy is hardly growing,” said Roodt.

The economy is growing at less than half the population growth rate, meaning South Africans are, on average, becoming poorer and unemployment and inequality will increase.

Roodt anticipates meagre growth for the full year of less than 0.5%.

“We need to make serious structural adjustments to the economy before it can grow at the 5% that we need it to grow at.”

South Africa can attain that level of economic growth – not overnight but within a year – if it implements the correct macroeconomic policies, Roodt said.

Dawie Roodt

PPS Investments portfolio manager Reza Hendrickse said 1.6% year-on-year growth is nothing to celebrate.

Despite the economy’s resilience, higher interest rates and inflation have left consumers with less disposable income.

PPS expects economic growth to remain constrained, particularly in the year’s second half.

Load-shedding remains a significant constraint, which may be more evident in the third-quarter growth stats, where the colder months tend to give rise to higher electricity demand.

The economy’s resilience this year comes down to the fact that the private sector is responding to Eskom’s failure by implementing its own power solutions, dampening the effect of load-shedding on economic output.

 

SOURCE:South Africa still at risk of recession – Daily Investor

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