Stats SA’s third-quarter GDP data give a glimmer of hope when days are dark and friends are few

6 Dec 2022

After contracting by 0.7% in the second quarter of 2022, the South African economy rallied in the third quarter. This could be a false positive, economists warn. But, as Eric Idle sang in Life of Brian: ‘Always look on the bright side of life.’

It’s neither the news the cynics had envisioned, nor what the fintwit pundits had warned about for months, but judging by the latest gross domestic product (GDP) data, the South African economy does not seem to be heading for the cliff – just yet.

Stats SA’s GDP data for Q3 paints a rosier picture than expected, and might buy us a minor reprieve despite jitters over the president’s stolen dollars; political uncertainty; Transnet’s legion troubles; rolling blackouts; crime; and a macro environment that is marred by war in Ukraine; the lagging effects of the pandemic; supply chain issues; a global economic slowdown and, and, and...

SA can barely be described as a growth economy, but at least we’re finally exceeding pre-pandemic levels – buoyed largely by agriculture.

Encouragingly, because the public need all the good news they can get right now, GDP increased by 1.6% in Q3, and real GDP for Q3 2022, measured by production, was R1.16-trillion (constant 2015 prices).

That’s well above an earlier median estimate in a Bloomberg survey of 12 economists for growth of 0.4%.

Still, it’s not much help to battling consumers, who are weighed down by the rising cost of living and declining real incomes. Q3 saw a 0.3% decline in household spending, most noticeably in food and non-alcoholic beverages (-0.9%) and recreation and culture (-1.6%), but they did spend 1.9% less on alcohol, tobacco and narcotics.

Economic activity in electricity, gas and water was dragged lower by decreases in the consumption of electricity and water – thanks to diminished supply as countrywide rolling blackouts escalated and water shedding took effect in Gauteng.

Manufacturing growth was mainly driven by the automotive sector and food and beverages. Construction increased – the first since Q1 2021 – in line with increased activities in residential buildings, non-residential buildings and construction works.

Agriculture, forestry and fishing increased by 19.2% in Q3, with increases in field crops and horticulture products.

Finance, property and business services increased by 1.9% in Q3, with growth from financial intermediation, insurance and pension funding, auxiliary activities, real estate activities and other business services.

Land transport, support and communication services also saw increased activity: the transport, storage and communication industry increased by 3.7%.

Manufacturing was up by 1.5%, with motor vehicles, parts and accessories and other transport equipment divisions making the largest contribution to the increase.

Net exports contributed positively to growth in expenditure on GDP, with exports increasing by 4.2%, largely due to increased trade in mineral products, metals used in industry or manufacturing, vegetable products and paper.

Imports increased by 0.6%, driven largely by increases in mineral products and animal and vegetable fats and oils.

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PPS Investments portfolio manager Reza Hendrickse is cautiously optimistic 2022’s growth will exceed the SA Reserve Bank and National Treasury’s sub-2% expectation.

“Better-than-expected third-quarter growth is refreshingly positive given the sustained wave of negative news both locally and abroad. However, we would caution against reading too far into the rebound, which was driven largely by more volatile, cyclical elements.

“Forward-looking data, such as PMIs and confidence measures, also suggest subdued conditions ahead, with electricity availability still a major headwind.”

Hendrickse says the other significant issue is that the global economy is seeing slowing growth, tightening financial conditions and developed market economies heading toward a recession.

“It would be hard for SA to buck the trend under that scenario, so global factors still pose a significant risk to the domestic growth outlook. After all, the SA economy is highly cyclical given its reliance on global trade and the commodity cycle.”

Escaping a self-induced technical recession – for now – is not a guarantee that we would avoid a downturn in 2023, says Maarten Ackerman, chief economist at Citadel.

“Although the overall economic data was positive, household final consumption – what local consumers are spending – declined in Q3.

“We are a consumer-based economy and our consumer spending is down by 0.3%. This tells us that our consumers are under severe pressure due to higher interest rates and higher inflation.

“Everyone is paying more for their basket of food, services and petrol, and we’re seeing spending cutbacks on food, beverages, furniture and household appliances, equipment, clothing and recreation.

“Unemployment is at an all-time high and many consumers are running out of the excess savings they had built up during the pandemic.”

Consumer spending and economic growth were both expected to decline over the next year and a half, Ackerman warns, as Eskom’s announcement that SA needed to brace itself for at least 18 months of intensified rolling blackouts was bad news. On the bright side, expanding the energy sector offers some hope.

Carmen Nel, economist at Matrix Fund Managers, says the economic growth was well ahead of consensus expectations of 0.4%. The strong quarterly print and the low annual base – in part due to the July unrest in 2021 – lifted year-on-year growth to a robust 4.1%.

“The upside surprise was largely due to a strong expansion in agriculture amid another bumper harvest across various grains. In addition, construction, trade, transport, storage and communication, and finance and business services all had a solid quarter.

“Intensified load shedding likely weighed on small businesses in the services sector, with community and personal services contracting in Q3.”

She says the improvement in production across mining, manufacturing, and trade mirrored stronger growth in exports and a substantial inventory build, which could reflect either improved supply chains or signal weak domestic demand.

“This would tie up with the decline in household consumption in Q3, as the spending breakdown revealed a defensive bias. Surging food and fuel prices, as well as larger interest rate increases, dampened consumer spending in Q3.”

On the plus side, she says restaurants and hotels showed improvement, which is likely a reflection of the recovery in inbound tourism.

Jeff Schultz, senior economist at BNP Paribas SA, says the improvement was broad-based and driven through a substantial spike in agriculture output (+19.2% q/q) alongside surprises in manufacturing (+1.5% q/q) and retail activity which climbed 1.3% in the quarter.

The expenditure side data is more telling, he says, as household consumption spending had contracted by 0.3% q/q on smaller non-durable goods purchases, as higher inflation ate into disposable incomes.

“The numbers indicate a more resilient economy in Q3 as well as a faster closing of the output gap than what the higher frequency numbers suggest. This is likely to have inflationary implications and should keep the SA Reserve Bank in hiking mode for now, we think. At the same time, however, the details highlight some cracks emerging in the outlook for consumers…

“Heightened load shedding into Q4 and 2023, stickier inflation, less supportive commodity prices and a souring global growth backdrop mean that we should expect momentum in activity to slow down sharply from here, and we even see scope for a small negative GDP growth print in Q4 2022.

“We maintain our well-below consensus 2023 GDP growth estimate of 0.2%.”

Any slight declines in critical crop harvests such as maize, production issues in the sugar industry, trade friction in fruits, vegetables, beef and wool, and widespread foot-and-mouth disease could weigh on the full year’s performance, notes Lara Hodes, economist at Investec, citing Agricultural Business Chamber data.

“Moreover, the mining sector remains susceptible to slowing global growth and, accordingly, demand.”

Hodes says a notable pick-up in business confidence (which slid further in Q3 22) is required to boost private sector investment.

“The consistent supply of electricity, political certainty and an improvement in the ease of doing business is imperative in this regard.”

Security of electricity supply remains a key priority as the economy cannot function optimally without access to reliable, affordable energy. And as a small, open economy, SA is highly susceptible to global events, with a slow global growth outlook and significant downside risk. BM/DM

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