SA’s economic activity probably stalled in the fourth quarter, with a high risk of contraction — and it will decline even more this year as the government fails to allay investor concerns over the electricity crisis, economists say.
The gloomy outlook from PwC, Investec and Nedbank comes days after the Reserve Bank slashed its 2023 forecast because of rolling power cuts, which threaten to trap SA in a prolonged period of stagnation and heap pressure on President Cyril Ramaphosa’s promises to reinvigorate the economy.
It is also in line with monthly economic indicators, which give a wide view of the GDP trajectory ahead of the actual Stats SA release, pointing to a possible fourth-quarter contraction.
Data shows that industrial production, which is made up of mining and manufacturing production and contributes 19.6% of GDP, was “hardest hit” by rolling power outages.
Mining production contracted for a 10th consecutive month in November, falling 9% after October’s 11% sharp drop, while manufacturing output slowed in October before contracting 1.1% year on year in November.
On the demand side of GDP, things are not as dire.
Even though retail sales fell in October, they rebounded in November, rising 0.4% above 2021’s levels, boosted by Black Friday sales. Credit demand also remained remarkably resilient but softened towards the year end, suggesting higher interest rates were starting to bite.
Data shows that new-vehicle sales fared better, with passenger vehicle sales up an impressive 16% year on year in the fourth quarter, driven by robust demand from car rental firms in response to the recovery in business and leisure travel.
Consumer confidence also surprised, improving over the quarter, with the FNB/BER consumer confidence index registering minus 8, its best level in two years and a significant upturn from minus 20 in the third quarter.
Nedbank senior economist Johannes Khosa said the uptick was attributed to lower inflation and higher employment but warned that “despite the mixed signals [in monthly indicators], the economy likely contracted in the fourth quarter”.
He said high-frequency statistics so far suggested that the economy relapsed and Nedbank now estimates a 0.4% quarter-on-quarter decline. “Acute power outages are mainly to blame, with load-shedding escalating to stage 6 on several occasions in the final months of the year, weighing on business and consumer confidence, and disrupting economic activity across all sectors.”
Investec chief economist Annabel Bishop said the drop in quarter four’s industrial activity so far comes from weaker electricity production, which was 2.7% lower than the corresponding period in the third quarter.
December saw the country’s energy availability factor fall to 50.4%, a weaker reading than in October and November.
‘No state solution’
“The persistence of load-shedding has eroded investor confidence in the domestic economy, with no state solution to end the damaging effect on the economy in the near term, as we have been increasingly noting over the course of this month,” Bishop said.
“For SA, economic activity likely stalled in quarter four, with the risk of contraction as shown by the recent industrial production figures.”
The difficult operating environment has also clouded the outlook for fixed investment.
A Nedbank report shows that while gross fixed capital formation held up relatively well last year, increasing by 0.3% in the third quarter, it slowed from previous quarters.
Khosa said the third-quarter increase was driven by increased capital outlays by general government and state-owned enterprises, while the private sector reduced capital expenditure by 1% over the quarter.
But he added: “Private firms became more hesitant as load-shedding intensified and tighter financial conditions dimmed domestic and global growth prospects.”
Bishop said the looming threat of stage 8 load-shedding and outages including stage 6 so far have eroded confidence in the domestic economic outlook “and with no government solution in sight in the near-term, the announcement of permanent load-shedding in the second half of January will see a downgrade in SA’s growth outlook”.
She added: “SA’s growing electricity crisis implies a substantially weaker 2023 outcome for the economy as we have increasingly noted this year so far, well below the 1.1% growth rate we had forecast at the end of December [and at the] start of January. [2023] GDP is likely closer to 0.6%.”
In its economic outlook report released on Monday, PwC said 208 days of load-shedding in 2022 reduced real GDP growth by up to five percentage points.
“In other words, economic growth could again have been close to 7% last year were it not for load-shedding,” PwC chief economist Lullu Krugel said.
“The channels of negative impact were diverse, including weaker consumer confidence weighing on retail spending, lower business confidence impacting investment decisions, and tainted international perceptions limiting foreign investment,” PwC said.
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