South Africa’s GDP exceeds expectations with 0.6% growth in Q2

After defying fears that the economy would fall into a recession in Q1, South Africa's economy has managed to grow for two straight quarters. But it is hardly shooting the lights out, with growth of 0.6% in Q2 following an expansion of just 0.4% in Q1 and a 1.1% contraction in the final three months of 2022. 

The economy on a quarter-on-quarter, seasonally-adjusted basis grew 0.6% in Q2, beating the Bloomberg consensus forecast of 0.3% growth. The rand got a brief bump, rising to 19.18/dlr from 19.25/dlr earlier. But like a sugar high, the rally quickly lost steam in the face of the current grim reality of stage 6 power cuts. 

“Six industries on the supply side of the economy grew in the second quarter, with manufacturing and finance driving much of the upward momentum. On the demand side, the country benefitted from a sharp rise in investments in machinery and equipment, which included products related to renewable energy,” Statistics South Africa (Stats SA) said in a statement. 

This highlights the point that it is not only power that is generated by solar panels. Demand for such products, as well as the installation and maintenance involved, also generates economic activity. 

The manufacturing sector was the main driver, with a 2.2% increase in production which contributed 0.3 of a percentage point to GDP growth. Manufacturers are clearly adapting to the rotational power cuts, and were given a boost in June when the scale of the blackouts did not reach anticipated levels. 

The finance industry contributed 0.2 of a percentage point to the overall growth number while the agricultural sector grew 4.2%, adding 0.1 of a percentage point to GDP. 

Four sectors were flat or posted a decline, including transport, which shrank 0.2%. 

Looking ahead, the economy remains unlikely to show any meaningful growth this year, even if its performance has exceeded expectations. The fact that paltry growth of 0.6% represents good news underscores just how badly this economy is performing.

There remain a plethora of challenges constraining the economy’s ability to grow. The return of stage 6 power cuts as spring erupts (outside of Cape Town) and in the wake of a surge in privately-produced renewables is a reminder that Eskom and the government remain out of their depth on the power front. 

Meanwhile, interest rates remain high and while the recent slowdown in inflation may stay the hand of the South African Reserve Bank (Sarb) when its Monetary Policy Committee (MPC) meets later this month, they are not coming down anytime soon. 

Read more in Daily Maverick: SA annual factory gate inflation eases to 2.7%, lowest level in almost three years

Some sectors that have done relatively well, like agriculture, confront looming climate concerns. 

“With Southern Africa heading towards a drier El Niño-affected summer, it is doubtful whether this very strong performance in agriculture will be sustained,” said Razia Khan, Chief Africa Economist at Standard Chartered Bank in London. 

The mining sector only posted growth in Q2 of 1.3% and cooling prices are expected to result in cuts to production and planned expansion projects. 

Depressed commodity prices in turn point to the many external headwinds to South Africa’s economy, including China’s sluggish recovery and bubbling geopolitical tensions as Russia’s war in Ukraine continues.

And while growth has been a bit perkier than expected, Khan notes that “fiscal revenue collection has underperformed”. 

Indeed, to prevent a total collapse in the country’s finances, National Treasury has told all government departments in provinces that no new spending will be allocated to them. 

Read more in Daily Maverick: SA’s delivery of crucial services under threat after Treasury desperately calls for public ‘fiscal consolidation’

South Africa’s economy is simply not growing fast enough to improve government's revenue stream and debt profile. Nor is it expanding fast enough to address the terrible trifecta of unemployment, poverty and inequality. With power cuts ramping up to stage 6 in the final month of Q3, don’t expect economic growth to pick up pace in a material way this year. DM