There were three positive economic surprises last week: GDP growth accelerated in the second quarter; SA’s purchasing managers’ index (PMI) ticked above the 50 neutral mark in August for the first time in six months; and both business and consumer confidence rebounded.
Many had feared that with more intense load-shedding likely in winter, deteriorating confidence and high interest rates, the economy would contract in the second quarter like it did in the final quarter of 2022. That growth accelerated instead is encouraging. Many economists are revising up their 2023 growth forecasts and the word “resilience” is being bandied about.
Three main factors seem to explain the improvement in SA’s data: private investment in renewable energy, a temporary reduction in load-shedding, and a drop in inflation. However, a harder look at the data suggests that while these factors may have allowed the sick economy to lift its head, the rest of its body remains flat on the floor.
The pickup in GDP growth from 0.4% in the first quarter to 0.6% in the second quarter is mainly because the big energy-intensive sectors of mining and manufacturing proved resilient to load-shedding despite April and May involving two of the worst months of power cuts on record.
Economic growth was bolstered by robust growth in private fixed investment, most of it on equipment and machinery related to renewable electricity infrastructure. While this is welcome and suggests mining and manufacturing could continue to defy load-shedding, there are several reasons not to jump to the conclusion that the economy is staging a turnaround.
The first is that there is a clear divergence between the more resilient mining and manufacturing industries and the ailing consumer-facing sectors. High household debt-service costs and soft jobs growth have led to a slowdown in consumer credit growth and a contraction in household spending despite the small improvement in consumer confidence caused by falling inflation.
Second, investment in private energy infrastructure erodes capital that could have been used for genuine business expansion. All it really does is allow firms to recover some of the lost ground caused by the failure of Eskom. By contrast, overall non-energy fixed investment actually declined in the second quarter. The prospects for a more generalised private sector investment upswing necessary to sustain faster growth are minimal.
This is where the uptick in the PMI and sentiment are important, given the strong correlation between fixed investment and business confidence. At 51 index points in August, up from 48.2 in July, the economywide PMI signalled a modest improvement in operating conditions driven by an easing of inflation pressures, less load-shedding and some stability returning to demand. However, this slight upturn doesn’t mean the tide has turned after a dismal first half to the year.
Similarly, despite the encouraging gain in the business confidence index from 27 index points to 33 in the third quarter, two thirds of the surveyed businesses still consider business conditions to be unsatisfactory. The slight reduction in load-shedding around the time the survey was conducted seems to be the main reason behind the rise in business confidence, especially among manufacturing firms. If so, the return to stage 6 load-shedding over the past week is likely to have sapped confidence anew.
So even as the economy has become more resilient to load-shedding and inflation has peaked, there is little to suggest that growth is going to strengthen over the remainder of the year. Indeed, it is hard to see where growth will come from, with industry just keeping its head above water, the consumer laid low, and exports constrained by internal logistics constraints and a weak external environment.
South Africans should avoid setting the bar so low that business survival is confused with “resilience”. Let’s not kid ourselves, “fragility” is a far more accurate description of the state of the economy.
• Bisseker is a Financial Mail assistant editor
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