SA economy hammered by load shedding, municipal tariffs and fuel prices

South African consumers continue to try to make ends meet as the economy continues to be hammered by load shedding, municipal tariffs and fuel prices.

However, two positive developments – higher car sales and a widening trade surplus – attributed to a growth in exports.

Vehicle exports increased by 18% in June 2022 compared to last year, although the total number exported during the first half of the year decreased by 2.9% compared to 2021. New vehicles sales increased by 7.6% in June compared to 2021, largely due to sales of new passenger cars increasing by 20.6%, with the recovering car rental industry buying 1 in 10 cars sold. However, new light commercial vehicles, bakkies and minibus sales fell by 20.8%.

Data from the SA Revenue Service (Sars) showed that the trade surplus widened to R28.4 billion in May, from an upwardly revised R16 billion in April. Exports grew by a solid 17.8% in June compared to May, while imports rose by a softer 10.9%.

ALSO READ: Stage 6 load shedding a ‘serious blow’ on all sectors of the economy – Busa

Fuel prices and load shedding a blow for economy

However, the Bureau for Economic Research (BER) at Stellenbosch University says soaring crude oil prices and domestic difficulties, including industrial action in the mining sector and flood-induced port delays, continued to weigh on annual trade balance developments, with the year-to-date (January-May) aggregate trade surplus contracting by 47% compared to last year.

It goes without saying that all local news were overshadowed by the country’s worst load shedding on record last week, with consecutive days of stage 6 load shedding way beyond the magnitude of rolling blackouts implemented in the past, when stage 6 was introduced for only one day in 2019.

Eskom said it will take a few weeks before power generation recovers to pre-strike levels, which does not bode well for economic activity. However, Eskom stated that stage 8 load shedding remains unlikely, the BER said.

“While many businesses and households have found ways to cope with the lower stages of load shedding, the negative impact on the economy amplifies with each additional stage after stage 2.”

ALSO READ: Stage 6 load shedding costs R4 billion a day, possible credit downgrade

Consequences of load shedding

This kind of load shedding also causes electricity substations to break down more frequently and also affects water reservoirs and traffic lights.

“Many battery – or other household-based alternative power solutions – struggle to keep up with extended periods of power outages, or do not have sufficient time to recharge in between blackouts. Even more permanent solutions such as diesel generators run into trouble after consecutive days of stage 4 or more load shedding.”

Large property companies, such as Growthpoint Properties, are struggling to source sufficient diesel to keep generators going in big shopping malls. Due to the record high price of diesel, some businesses have to re-evaluate when it is essential to keep the power on during Eskom blackouts. The hefty new fuel price increase will make this situation worse.

In addition, households will feel the effect of the municipal electricity tariff increase that came into effect on Friday, but even before this increase and the current load shedding, the second quarter FNB/BER Consumer Confidence Index (CCI) already showed a marked slowdown in consumer spending. The June Absa PMI also suggests that after a stellar performance in the first quarter, the manufacturing sector is set to be a drag on Q2 GDP.

ALSO READ: Absa PMI shows worrying deterioration in demand and activity

Impact on economy

The BER points out the impact of load shedding on the economy and investment in the country.

“This is near impossible to estimate in monetary terms and depends on your assumptions about the counterfactual reality without the electricity constraint. In addition to further depressing already subdued SA business and consumer confidence, the move to stage 6 also soured foreign investor sentiment towards SA. This likely contributed to the slide in the rand exchange rate.”

The rand lost about 4% week-on-week against the US dollar, closing weaker than R16/$ on four consecutive days last week. According to the BER, local woes are not fully to blame for the weakness as the greenback saw broad-based strength last week, although the rand did underperform compared to its peers.”

On the employment front, private sector employment rose by just 81,000 year-on-year and even declined on a quarterly basis. The BER says overall, the post-pandemic formal sector employment recovery remained incomplete with total formal employment in the first quarter still 200,000 jobs (1.9%) below the levels in the fourth quarter of 2019.

ALSO READ: Even higher inflation and repo rate means more consumer pain ahead

Interest rates will follow

Herman van Papendorp, head of the Momentum Investments research and insights team, says the real gross domestic product (GDP) reached pre-pandemic levels for the first time at the start of 2022, but activity in six out of 10 industries remained below levels observed in the first quarter of 2019.

“The agriculture sector was the best performing industry over this period, while construction lagged by 25%. After a strong start to the year, a deteriorating global growth backdrop, intensified load shedding and damaging local floods are likely to act as significant headwinds to growth in the second quarter of the year and threaten to push the quarterly figure into marginally negative territory.”

He said a sharp rise in food costs and higher fuel inflation drove a significant upside surprise for May’s figure. “Although inflation jumped by more than anticipated at a headline level, core inflation picked up at a more moderate pace, indicating that the upswing in inflation was primarily driven by supply-side shocks.”

Therefore, Momentum Investments still expects policy adjustments in increments of 50 and 25 basis points in contrast to larger increases of 75 basis points. “We now see interest rates peaking at 6.25% by the end of the first quarter of 2023. A more hawkish approach to monetary policy could nevertheless be taken should the Monetary Policy Committee view rising risks of broader based price pressures or should signs of significantly higher wage costs start building.”