All signs point to recession
South Africa is on the edge of recession after printing a much more larger than expected contraction in gross domestic product (GDP) on Tuesday (7 March).
According to the figures published by Stats SA, the country’s economy declined by 1.3% in the fourth quarter of 2022 – three times larger than market consensus, which estimated a 0.4% drop.
The bad news for the country is that all indications are that the first quarter of 2023 will also be negative, which would put South Africa squarely in a technical recession – defined as two consecutive quarters of economic decline.
According to Citadel Chief Economist Maarten Ackerman, while various points of data in the GDP numbers tell a different story for different sectors of the economy, it’s crystal clear that load shedding was the cause of all the economic damage, exacerbating other entrenched issues in the economy.
“Everything indicates that the first quarter of 2023 will also be negative, because of the amount of load shedding we’re seeing at this point in time, coupled with the logistical issues faced in our rails and ports infrastructure,” he said.
“This will give us two consecutive negative quarters, which by definition is a technical recession.”
The economist noted that household consumption remained positive at 0.6%, despite a decline in the previous quarter. This shows that consumers are still maintaining some spending despite struggling with lower take-home pay, low savings, high unemployment and rising interest rates.
However, much of this spending was done on credit, which lines households – particularly middle-class households – up for debt problems along the way.
FNB’s response to the GDP numbers was that it represented a “martial setback” for the economy, adding that the outlook for 2023 remains bleak.
“The most significant threat to economic stability is the ongoing hard power shortages, which by our current forecast, have effectively pushed the economy into a two-quarter technical recession between 4Q22 and 1Q23.”
In this situation, private sector fixed investment growth will be curtailed, threatening the job market recovery.
Nedbank shared the same sentiments, saying that the 1.3% contraction reflected the adverse consequences of load-shedding – and that the situation has only deteriorated in the first quarter of 2023.
“The outlook for 2023 is gloomy, with load-shedding casting a long shadow over prospects. So far this year, conditions have deteriorated even further as load-shedding intensified dramatically. Our preliminary forecast is for GDP to shrink by a further 0.5% qoq in Q1, which means the economy probably entered a technical recession,” the bank said.
Settle in
The significant contraction in the fourth quarter of the year is more than just a warning for a technical recession – which is all but cemented at this stage – it also puts the country at risk of economic decline for the 2023 full year.
Stats SA’s figures showed that annual growth for 2022 also came in lower than expected at 2.0% versus the consensus of 2.3%.
According to Ackerman, this level of annual growth is not enough to address South Africa’s structural issues.
“A 2% growth rate does not mean much if you consider that it’s not out-running our population growth, and we have been stuck in the low growth environment for the past couple of years,” he said.
Ackerman noted that the growth figures meant that South Africa was doing worse than before the Covid-19 pandemic and that the economy is stuck at the same economic level as in 2018.
“That’s five years of going nowhere slowly, which, again, speaks to the structural issues we’re facing on a daily basis in South Africa.”
This raises red flags for worse to come.
At its last Monetary Policy Committee (MPC) meeting, the South African Reserve Bank projected 0% growth for the fourth quarter of 2022, and GDP growth of 2.5% for the full year. These projections proved to be optimistic.
But this places the central bank’s full-year projections for 2023 on shaky ground. At the same MPC meeting, the SARB made a massive cut to its growth projections for 2023, expecting just 0.3% annual GDP growth in January, down from 1.1% before.
With the significant overestimation for 2022, this 0.3% growth could easily end up being a more bullish take on reality.
As with the Q4 2022 and Q1 2023, the biggest threat to South Africa’s long-term economic outlook is load shedding.
The SARB premised its paltry 0.3% growth outlook on South Africa, experiencing just 200 days of load shedding in 2023 – however, the country has so far experienced outages every day of the year (67 days in total). Analysts and economists point to the situation getting worse.
While easing of load shedding is expected in the latter part of the year, with no short-term solutions, outages are expected to get worse as the country heads into winter. The easing of load shedding is also contingent on Eskom and the new ministry of electricity sticking to timelines and everything going as planned.
Eskom has already noted that it will miss a key target to bring 1,800MW of power back online by the end of March – so things are off to a bad start in this regard.
FNB said that if intensified load-shedding persists, surpassing what is currently envisaged in most projections, “a prolonged recession will be likely”.
FNB cut its growth forecast for 2023 to 0.4%. Nedbank took a harsher stance, putting the country’s growth expectations on the cusp of recession at just 0.1%.
“Even with this considerable downgrade, the risks to our forecasts remain on the downside,” it said. “There is a strong probability that the economy could contract over 2023 as a whole.”
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