GDP contraction in first quarter opens door for economic recession

The GDP contraction in the first quarter opens the door for a possible economic recession in the second quarter of 2024, economists warn as South Africa’s stop-go economy fell by 0.1%.

Softer industry and construction activity contributed to the downward momentum on the supply side of the economy, while the demand side experienced a decline across all components.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says it was in line with their expectation of a mild contraction following a series of disappointing data releases for March. “Although not our base case, the latest quarterly contraction opens the door for a possible economic recession in the second quarter.

“There have not been any scheduled power outages since late March, but disappointing new vehicle sales so far for the second quarter show that demand remains weak and it is unlikely that economic activity would have picked up strongly ahead of the elections.

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Forecast of 0.7% growth for 2024

“We retain our below-consensus real GDP growth forecast of 0.7% for 2024. Demand conditions remain unfavourable amid sustained high interest rates and ongoing supply-side constraints and are not expected to improve materially in the near term.”

He says considering all the uncertainty at the moment it is difficult to identify what the catalyst to spur economic growth might be. “The real economy has gone nowhere since the pandemic, while inflation continues to erode South Africans’ purchasing power. Real GDP per capita has remained stagnant since 2007, while unemployment has kept on rising.”

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The unexpected election results mean that things have become even more uncertain, Van der Linde says and all bets are off. “A business-friendly coalition outcome would improve confidence and should unlock fresh investment that could give the economy legs to run from the second half of the year.”

Difficult for economy to regain momentum

Prof Raymond Parsons, economist at the North-West University Business School, says the negative GDP growth figure again reflects how difficult it has been for the economy to gain momentum in the recent past.

“Although GDP growth may yet reach about a modest 0.9% in 2024 as a whole, total GDP in the first quarter was in fact lower than the peak reached in the third quarter of 2022. South Africa’s continued disappointing growth performance remains the most significant feature of the country’s macroeconomic performance.”

Parsons says the persistent decline in per capita income over several years means that the nation as a whole has become poorer. South Africa needs to break out of its ‘low-growth trap’ in order to more successfully tackle the triple challenges of unemployment, poverty and inequality.

“South Africa’s latest growth statistics send a strong message in the aftermath of the recent elections. These are the economic imperatives that key political leaders currently engaged in crucial coalition talks must visibly incorporate into their agenda of discussions.

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“The outcome of present coalition negotiations must create the necessary political stability and effective governance that support investment, growth and job creation. South Africa needs growth of 3% or more for a bigger, stronger and better economy. A clear and predictable policy environment then enables businesses to take a long-term perspective on growth and development.’

Outturn below consensus of 0.1% expansion

Thanda Sithole, senior economist at FNB, says the economy’s poor performance in the first quarter was consistent with the weakness observed in the goods-producing sectors, with weak demand filtering through to the services-providing sectors.

“The outturn was below our and Reuters’ consensus predictions of a 0.1% quarterly expansion, although the prediction range among analysts was wide, reflecting divergent views amid elevated uncertainty and weak fundamentals.”

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However, Sithole points out, despite the quarterly weakness, GDP expanded by 0.5% compared to the corresponding quarter last year, indicating a slow but steady growth above pre-pandemic levels.

“Stability from the post-election government will be crucial for preserving economic progress and the uninterrupted implementation of economic reforms will be vital to boosting growth and employment.”

Political uncertainty expected

Adriaan Pask, CIO at PSG Wealth, says with coalition talks in the spotlight, political uncertainty is expected to weigh on the South African economy and investor sentiment over the short term, but these risks are already priced into very depressed valuation levels in large portions of the local market.

“We believe it is particularly important that advisers spend time engaging with clients about their long-term strategy. “Our growth assumptions already take periods of market weakness and underperformance into account. While it can be difficult to resist the urge to adjust portfolios in light of a challenged economic backdrop, clients are best served by focusing on their long-term plans.”

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Crystal Huntley and Johannes Khosa, economists at the Nedbank Group Economic Unit, say they expect another year of modest economic growth as high interest rates subdue demand and confidence.

“The improvement in electricity supply since April and smoother logistics networks will likely enable slightly faster growth over the second quarter, providing much-needed relief to producers. Global demand should also improve moderately as the year progresses.”

In addition, they say, commodity prices have increased, driven by expectations of firmer demand, a softer US dollar and tight supplies in some commodities. “This should bode well for value added by the export-orientated industries, such as mining and manufacturing, which account for nearly 20% of GDP.”

Local producers’ ability to exploit upturn in world economy limited

However, they point out, given South Africa’s high-cost structures and generally unfavourable supply conditions, local producers’ ability to exploit any upturn in the world economy is limited. They also expect that the agriculture sector will probably weaken in the second quarter due to the lagged impact of the drought experienced over February and March.

“At this stage, real GDP is forecast to increase by 0.5% in the second quarter, 0.6% in the third quarter and 0.7% in the fourth quarter. These will translate into a growth rate of 0.9% for the year. However, downside risks remain elevated as the underlying energy problem remains unresolved and the inefficiencies in rail freight and port services will likely persist for longer, which will weigh on sectoral growth over the year.”

Furthermore, they say, high interest rates will continue to strain household finances, weighing on consumer confidence and demand.