SA’s economy ‘almost certainly’ contracted in second quarter, recession may be looming

4 Sep 2022

Economists reckon South Africa’s gross domestic product shrank by 0.9% between April and June — three months during which floods ravaged KZN, rolling blackouts darkened the national mood and stagflation tightened its grip.

South Africa’s economy almost certainly contracted on a quarterly basis in the second quarter (Q2), economists say, though the jury remains out on whether or not a recession is looming amid some tepid signs of promise.

Statistics South Africa (Stats SA) will release the Q2 gross domestic product (GDP) figures on Tuesday.

The Bloomberg consensus is that, on a quarterly basis, the economy shrank by 0.9% during the April to June period, which was marked by the KwaZulu-Natal floods in April, intensified rolling blackouts, surging inflation and rising interest rates. This follows the 1.9% expansion in Q1 that brought national output back to pre-Covid levels.

Manufacturing, which played a starring role in Q1, is a key reason for the faltering performance.

“The stellar performance by manufacturing in Q1, which was the main reason for the boom in South Africa’s Q1 real GDP, will not be repeated in Q2 after the industry was battered by heavy flooding in KZN during April, followed by intense power outages.

“The latest batch of industry data and June retail sales figures play into our expectations of a quarterly economic contraction of 0.7% [quarter on quarter] in Q2, as well as our below-consensus real GDP growth forecast of 1.9% in 2022,” said Jee-A van der Linde, an economist at Oxford Economics Africa.

The data have been generally negative and the June numbers sealed the case for a Q2 contraction against the backdrop of slowing global economic growth and accelerating inflation, trends driven in part by Russia’s invasion of Ukraine, which threw a bear-sized spanner into the works of the worldwide recovery.

South African mining production fell by 8% in the year to June, its fifth consecutive month of decline. The three-month strike at Sibanye-Stillwater’s gold operations was among the constraints to output in the sector. Manufacturing production dropped for the fourth month in a row in June, falling by 3.5% year on year. And retail sales also tanked in June, by 2.5%.

When South Africans spend less, it’s always a worrying sign. It all adds up to an economy on the back foot.

“Looking ahead, domestic fuel prices will remain high and stifle economic activity in the second half of 2022. A real income squeeze from higher inflation and further interest rate hikes should also dampen economic growth. Consequently, it is looking increasingly plausible that South Africa’s economy might enter a recession in Q3 2022,” Van der Linde said.

A recession occurs when an economy contracts for two consecutive quarters and the current one got off to a rough start amid industrial-scale rolling blackouts and the headwinds presented by a souring global economy.

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Moody’s cuts G20 growth forecast

Ratings agency Moody’s on Wednesday cut its forecasts for overall growth in the G20 economies, which include South Africa.

“Moody’s Investors Service has reduced growth forecasts for G20 economies and now expects real GDP to rise 2.5% in 2022, down from a May projection of 3.1%, while its forecast for 2023 has been cut to 2.1% from 2.9%,” it said in a statement on 31 August.

Madhavi Bokil, senior vice-president at Moody’s, said in the statement that central banks were unlikely to halt their hiking cycle until there was “decisive proof that high inflation no longer poses a threat to their policy objectives”.

Pointedly, Moody’s also noted that the “invasion of Ukraine remains central to the larger macroeconomic picture”.

Some economists say it is too early to call a South African recession — the quarter only concludes at the end of September and, among other things, load shedding has abated from its winter rampage, though rolling blackouts remain a clear and present risk.

Thanda Sithole, a senior economist at FNB, said: “We don’t expect two consecutive quarters of economic contraction. But we do expect a limited recovery going forward. The risks of recession are obviously high but that is currently not our base case.”

There have been a few green shoots as spring emerges.

The Absa Purchasing Managers’ Index (PMI), a key gauge of health in South Africa’s manufacturing sector, rose to 52.1 points in August from 47.6 in July. This reversed two consecutive months of decline and is a sign that manufacturing is starting to recover.

Absa noted that there were also signs that inflation is starting to slow.

“On a positive note, the purchasing price index declined for a second consecutive month and is now at the lowest level since mid-2021. Importantly, this means that the rate of increase in costs is slowing, not that prices are declining,” Absa said.

“The steep fall in the fuel price at the start of August likely helped with alleviating overall cost pressures, with a further notable decline in the fuel price expected next week. While headline producer price inflation for final manufactured goods remains very high, the PMI suggests that cost pressure at the start of the pipeline has moderated.”

Moderating prices would be welcome as the rising cost of living — consumer inflation is running at 7.8% and food inflation is outpacing that — is extracting a grim toll on an economy saddled with an unemployment rate of 33.9%.

This wicked combination of inflation and unemployment, combined with a contracting or slow-growth economy, means South Africa is caught in the rut of stagflation. As the name suggests, this refers to a stagnating economy with inflation accelerating beyond normal levels.

In short, it means pain all around, which is the last thing that a society with such stark levels of inequality needs. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.

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Moody’s cuts G20 growth forecast