Amid fears that the global economy will head into recession, SA’s economy has recorded a negative quarter — but one that, depressingly, was more the result of self-inflicted woes than global ones.
The economy contracted 0.7% in the second quarter, after an unexpectedly strong bounce in the first quarter. The result is that in the first half of 2022, the economy was just 1.4% larger than in the first half of 2021 — and is now back below pre-Covid-19 levels. More optimistic economists will stick with their full-year forecasts of more than 2%; more sober ones expect growth of hardly more than 1.7%-1.8% for 2022. And the medium-term outlook is even more sobering, with most forecasting that the economy will remain at 1%-2% for a good while yet, in an environment in which load-shedding could well continue until 2025.
There was load-shedding on more than half the days in the second quarter. That was the one big self-inflicted woe that caused the economy to contract. The damage done by power outages is amply evident in the fact that the manufacturing sector made the largest negative contribution in the second quarter, during which it contracted almost 6%.
Also negative was the mining industry. That’s disturbing given that global prices for some of SA’s key export commodities are still high, even if they are off 2021’s peaks. But mining was affected not only by load-shedding at Eskom but also by the dysfunction at SA’s other big state-owned utility, Transnet, which cannot get trains to run to the ports and in addition saw its harbours hit by a cybersecurity incident.
Added to the litany of state-owned enterprise woes was the flooding in KwaZulu-Natal in the second quarter, which damaged transport, manufacturing and commercial infrastructure and destroyed lives and livelihoods. The floods highlighted the risk of climate change. But they also highlighted the need for provincial and national government to do much more to insulate key infrastructure against extreme weather and to respond much more swiftly and effectively to contain the fallout from natural disasters.
Investment spending
On the bright side, the second-quarter GDP data from Stats SA showed continuing recovery in some of the sectors that had been hardest hit by the Covid-19 pandemic, with spending on restaurants up 6.2%. Consumer spending made a positive contribution to second-quarter growth and much of that was on services. Encouragingly, investment spending made an even more positive contribution.
It is investment spending that will provide the basis for SA to sustain higher rates of growth and job creation. It had languished for years even before Covid-19 and crashed during the pandemic. It is still well below its pre-Covid levels, but at least it’s positive again. The trouble is that much of the spending is going on machinery and equipment — which is essentially companies modernising and automating existing facilities, not building the new facilities that would expand productive capacity and provide a platform for higher growth and employment. That’s reflected in the absence of investment in construction — a trend Stanlib economist Kevin Lings points out has prevailed for the past five years.
The bottom line is that investor confidence and investment are still not there despite some delivery on long-promised structural economic reforms, and despite all President Cyril Ramaphosa’s investment conferences and promises of infrastructure investment. The government will have to move much faster and with more resolve if it wants to start pulling SA’s economy out of its 1%-2% slump and have a chance even of starting to dent the country’s tragically high unemployment rate.
With the world economy facing tough times, SA will get little help from abroad. Indeed, its economic fortunes could well get worse as global demand declines and global financial markets become ever more hostile.
On the upside, SA has plenty of potential to turn its economy around if it presses ahead rapidly with implementing reforms and shaking up state-owned enterprises and the state itself. The latest data is a reminder that the imperative to do so has never been more urgent.
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