The decline in gross fixed capital formation for the first quarter of the year means investors are holding onto their money as they cautiously watch election outcomes.
Statistician-general Risenga Maluleke told Business Times that elections tend to cause investors to be cautious globally.
In South Africa, the underperformance in gross fixed capital formation figures over the last three quarters is proof of this.
“For the last three quarters, they haven’t been doing well. In the third quarter of 2023, investments went south. They contracted by 4.7%. And then they went south again in the fourth quarter, 0.2%. And in this quarter that we are reporting they contracted by 1.8%.
“All over the world, where there are elections ... other than inflation ... investors always watch closely what is likely to happen. So they hold back their investments. We can see that investments have been feeling the pressure since the third quarter of last year.”
Stats SA’s statistical report said gross capital formation in South Africa was down 5.4% in the first quarter of this year.
Gross fixed capital formation — which includes land improvements, plant, machinery, and equipment purchases and the construction of roads — stood at R662.5bn in the first quarter of 2024 compared to R674.9bn in the fourth quarter of 2023.
The main negative contributors to the decrease were machinery and other equipment, down 1.4%; residential buildings, down 4.3%; and construction works, down 2.5%.
Maluleke said public investment in infrastructure could boost investor appetite in the long term.
“If you are an investor, would you want to go and invest in a country where there is no electricity, for starters? Would you want to invest in a country where there is no water? Would you want to invest in a country where it takes a long time for goods to get to their market by rail and road? Investors are like that ... Infrastructure becomes vital for any country that wants to attract investors.”
Antswisa Capital chief economist and director Miyelani Mkhabela said gross fixed capital formation was an important aspect of a country's economy since it increases productivity, raises living standards, and produces and maintains jobs.
It is an indication that South Africa’s infrastructure and industrial development allocation dropped significantly, which poses challenges for a drop in GDP in the future. One of the key reasons for the absence of gross fixed capital formation growth in South Africa is a lack of private investment
— Miyelani Mkhabela, Antswisa Capital chief economist and director
“[It] is an indication that South Africa’s infrastructure and industrial development allocation dropped significantly, which poses challenges for a drop in GDP in the future. One of the key reasons for the absence of gross fixed capital formation growth in South Africa is a lack of private investment,” he said.
GDP decreased by 0.1% in the first quarter of 2024, with decreases in manufacturing as well as mining and quarrying.
Mkhabela said another challenge was the state of public infrastructure which is critical for economic growth and development but has been neglected, with little investment in maintenance and new construction.
“Facilities management in infrastructure and industrial development ... has been a huge weakness for South Africa.
“Eskom and Transnet are unfortunate examples of how the inability of two state-owned entities to fulfil their constitutionally mandated responsibilities has harmed economic activity and growth.”
“Declining gross capital formation will affect the GDP for South Africa and that will be worse in terms of the current livelihoods crisis South Africa is facing.”
Efficient Group economist Dawie Roodt said the data illustrates a vicious cycle where investors become conservative about investing in a low-growth environment which results in subsequent growth underperforming.
“The one is that the state and the various state-owned enterprises are just not investing enough in capital, maintaining infrastructure as an example. But the private sector is also not investing, and they are not investing because of weak economic growth.”
He said political certainty and general investor confidence played a role and “the wrong” configuration of government would cause gross capital formation to deteriorate even further.
“People just don’t trust government, and now we’ve got even more political uncertainty that will affect these numbers quite significantly. And I hope the politicians look at these kinds of numbers. We have to create an environment where we can get these numbers up, and I’m afraid ... of the outcome of a possible coalition.”
North-West University Business School’s Prof Raymond Parsons said: “If the economy is to break out of its present low growth trap of 1%-1.5% annual GDP growth, the outcome of the coalition negotiations needs to eventually create the overall macroeconomic framework of efficiency, stability, and consistency that the economy needs.”
He said the financial markets were already reflecting a strong cautionary stance pending the outcome of political negotiations.
South Africa needed 3% growth or more to meet its socioeconomic challenges, he said.
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