SA’s economy risks falling into recession in 2022 as the worst power cuts in more than two years combine with weakening consumer confidence and demand and April’s devastating floods in KwaZulu-Natal to undermine its already fragile prospects, economists say.
Their comments on Monday came as SA entered a third week of rolling power cuts, which have frustrated society and businesses, which have at times been left without electricity for as long as six hours.
It shines a harsh spotlight on the decade-long problem of unreliable energy supply facing the government.
If severe load-shedding persists for the rest of this quarter (the third) and if second-quarter GDP contracts — as it is feared it may do because of weakening demand and the floods in KwaZulu-Natal — then SA could risk a technical recession, said Annabel Bishop, chief economist at Investec.
“The current severe degree of load-shedding is not expected to continue,” Bishop said. “But if it did it would collapse the SA economy into recession, after the contraction that is expected to have occurred in GDP [in the second quarter of 2022].”
Eskom, which supplies virtually all of SA’s electricity needs, has blamed the severity of the latest rounds of load-shedding on an unlawful strike over wages, which on Monday remained unresolved pending feedback from unions on Eskom’s latest wage offer.
The wildcat strike, which included acts of intimidation against workers who wanted to go to work, resulted in a stayaway of about 90% of workers at some power stations, Eskom said. The maintenance backlogs caused by the strike could take weeks to clear and Eskom has warned the power system is likely to remain constrained for some time.
Stage 6 load-shedding, when 6,000MW of capacity is taken from the grid to prevent a collapse that would bring the country to its knees, adds to the list of issues undermining the outlook.
GDP growth, which beat forecasts in the first quarter as SA eased almost all Covid-19 restrictions, is already expected to slow in the second quarter after floods in KwaZulu-Natal hit confidence and disrupted operations at a Toyota plant.
Rising interest rates and weak consumer confidence — which plunged to the lowest level in three decades during the second quarter — could also hit spending by households, which accounts for 60% of GDP. The finances of consumers are also being squeezed by steeply rising fuel and food prices.
“While many businesses and households have found ways to cope with the lower stages of load-shedding, beyond stage 2 the negative effect on the economy amplifies with each additional stage,” said Hugo Pienaar, chief economist at the Bureau for Economic Research.
In addition, due to the record price of diesel, some businesses that make use of diesel-powered generators to keep their doors open during load-shedding will have to re-evaluate when it is essential to remain powered up during blackouts.
On Wednesday fuel prices will reach new highs when the price of petrol will go up by about R2.50/l to above R26.30 and diesel will go up by R2.30/l to about R25.50. This is in part due to the halving of the R1.50 fuel levy relief to 75c, unless the government decides to prolong the relief, said Pienaar.
Some businesses have made allowances for alternative power sources. However, this is not sustainable for many small businesses, said Isaah Mhlanga, chief economist at Alexforbes.
“Severe ongoing power cuts will negatively weigh on economic activities, primarily on industries trying to restore operations after the Covid-19 lockdowns and flood disruptions.”
The overall effect of load-shedding on SA’s economic outlook will depend on how long it takes for Eskom to restore power supply to an extent that only lower levels of load-shedding will be required to stabilise the grid.
“The estimated theoretical cost for stage 6 load-shedding, if it lasts for 24 hours, is R14.6bn. If this were to last for a period equivalent to a full month, it will imply a R440bn cost to the economy and put 18,699 jobs at risk,” Mhlanga said.
However, he added, it is not expected at this time that stage 6 load-shedding will be the norm going forward. “More realistic and plausible load-shedding levels that we can expect are stage 1 and stage 2.”
The slow progress being made in achieving structural reforms that can improve SA’s energy availability will continue to place a damper on economic growth until 2024, said PwC chief economist Lullu Krugel.
Eskom’s energy availability factor, a measure of available capacity against total installed generation capacity, dropped to 61.2% in the third week of June, with three-quarters of outages due to unplanned breakdowns.
“The low energy availability factor and unreliable supply of power is the primary constraint on faster economic growth and will limit medium- to long-term potential growth to about 1.5% per annum,” Krugel said.
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