Load-shedding, floods and industrial unrest drove SA’s economy to shrink back below prepandemic levels in the second quarter, with the economic growth rate for 2022 now expected to come in at less than 2% despite the government’s progress with structural reforms.
Stats SA reported on Tuesday that the economy contracted 0.7% quarter on quarter, offsetting the better-than-expected 1.7% first-quarter GDP (revised downwards from 1.9%).
Economists said the sharp contraction reflected electricity outages and prolonged industrial action in the mining and manufacturing industries, as well as rail and port capacity constraints, which are unlikely to improve in the short term.
These shocks, coupled with strict Covid-19 lockdowns in China, generally weaker global demand and softer commodity prices hit the production side of the economy hard.
The GDP numbers from Stats SA came as the cabinet lekgotla was held this week in the run-up to the medium-term budget policy statement to discuss how best to reform and implement economic policies, as well as President Cyril Ramaphosa’s energy plan.
Government bonds and the rand weakened after the release of the GDP numbers, with the yield on the benchmark R2030 government bond rising 19 basis points to 10.52%. Bond yields move inversely to their prices.
At 6pm, the rand had weakened 0.56% to R17.26/$.
The data showed seven industries recorded negative growth during the second quarter, with manufacturing, mining and agriculture making the largest contributions to the contraction in GDP.
Growth was due to household consumption spending and fixed investment, which was driven mostly by machinery and transport equipment.
The figures prompted several economists to revise down their growth forecasts for 2022. Oxford Economics revised its projection from 1.9% to 1.8%.
Africa economist at Oxford Economics Jee-A van der Linde cited the slow pace of policy reform and said global economic conditions had deteriorated in recent months, with the picture for emerging markets, including China, generally worsening.
“The risk of load-shedding remains high and will continue to undermine the SA economy. Despite decreasing, domestic fuel prices remain elevated and will throttle economic activity in the second half. A real income squeeze from higher inflation and further interest rate hikes should also dampen economic growth,” he said.
Stanlib chief economist Kevin Lings also sees growth of below 2% for 2022, while PwC has revised its forecast down from 2% to 1.5% given the constraints on economic growth.
“The SA economy is struggling to gain momentum despite the lifting of all Covid-19 restrictions and has become locked into a trend growth rate of 1% to 2%,” Lings said.
“Unfortunately, a growth rate of around 1.8% [Stanlib’s 2022 GDP forecast] is still well below the rate required to inspire an increase in private sector fixed investment and widespread job creation,” he said.
The government’s private and public infrastructure growth initiative — as outlined in the reconstruction and recovery plan — needs to move ahead rapidly in trying to initiate a wide range of investment projects to stimulate growth and employment, he said.
“The government cannot afford to cut taxes extensively in order to boost household consumption as well as corporate investment given [its] extreme fiscal constraints.
“Equally, the SA government does not have the scope to meaningfully increase its own spending given [its] current debt trajectory, as confirmed by the policy stance adopted in the February 2022 national budget.
“At the same time, the Reserve Bank has clearly signalled that interest rates can be expected to move higher during the remaining months of 2022 and into early 2023, and increasingly act as a constraint on growth,” Lings said.
The government needs to continue deregulating economic activity and start making it easier to do business, he said.
Anchor Capital investment analyst Casey Delport said material job creation will occur only when GDP growth approaches 3% a year. “The SA economy is not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans.”
The lekgotla came almost two weeks after labour federations Cosatu and the SA Federation of Trade Unions took to the streets of the country’s major cities to demand that policymakers tackle the mounting cost of living. One union leader, Zwelinzima Vavi, called for a R1-trillion cash injection into the economy after inflation reached 7.8% in July, well above the central bank’s 3%-6% target range.
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