Recession at the door, as South Africa’s fourth quarter GDP worse than expected

The gross domestic product (GDP) statistics for the fourth quarter of 2022 were worse than expected and spells nothing good for the economy in 2023. Rolling blackouts are the main reasons for the decrease in economic activity that saw the economy shrink by 1.3% compared to the third quarter growth of 1.8%.

However, prof. Bonke Dumisa, an independent economist, says that the gross domestic product (GDP) figures are not a surprise at all and were expected given all the economic challenges of Eskom’s load shedding and other economic uncertainties.

“The sad reality though is that we do not expect the GDP figures for the first quarter of 2023 to be any better and if we have another negative economic growth rate, it will mean we are going to be in a technical recession, which happens when a country has two consecutive quarters of negative GDP growth rates, but let us hope it does not happen.”

Prof. Jannie Rossouw, economist and visiting professor at Wits Business School, agrees that the dive was not unexpected.

“However, I am more worried that the population is growing faster than the economy, which means we will stay stuck in poverty. Nothing will change with the current government and its policies.”

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2% GDP growth in 2022

Economic research group, Oxford Economics Africa, says the shock contraction means that real GDP growth came in at 2.0% in 2022 and with persistent rolling blackouts that intensified since the start of 2023, the economic outlook for this year is considerably darker.

The decrease in GDP was weaker than the group’s expectation of -0.5% and lower than the consensus forecast of a 0.4% contraction.

Seven of the ten industries contracted in the fourth quarter. South Africa’s largest subsector, the finance, real estate and business services industry, decreased by 2.3% compared to the third quarter, contributing -0.6 ppt to overall GDP growth.

Decreased economic activities were also reported for financial intermediation, insurance and pension funding and auxiliary services, while the mining and quarrying industry decreased by 3.2% and agriculture, forestry and fishing contracted by 3.3%.

The manufacturing industry contracted by 0.9%, slashing 0.1 percentage point off GDP growth, with half of the manufacturing divisions reporting negative growth rates, with the food and beverages division weighing most on the sector.

The group warns that the incessant power outages are especially damaging to food producers and this will have serious implications for food price inflation this year.

“According to StatsSA, the economy has grown by only 0.3% from 2019’s pre-pandemic levels which was notably lower than the estimated 3.5% increase in the country’s population over the same period.”

South Africa is also experiencing an unprecedented scale of power outages, which is not conducive to economic growth. The group also warns that the odds of a recession have increased, with the medium-term growth prospects looking exceptionally dull.

ALSO READ: Load shedding, Transnet cut 2023 SA growth outlook – Absa

Rolling blackouts cause 1.3% contraction in economy

Frank Blackmore, lead economist at KPMG South Africa, also says the devastating impact of rolling blackouts in the fourth quarter is clearly visible from the results of GDP.

“The number of days of load shedding means that the economy contracted by a real 1.3% in the fourth quarter. This leaves total growth for the year in the annual real growth at 2% points for 2022 after the 4.9% that we experienced a year earlier.”

Blackmore says this highlights the fact that we need to sort out the energy problems both in terms of supply and consistency in order to be able to get this economy back to decent growth rates.

“The Reserve Bank recently said that it estimated a two percentage points decrease in economic growth if we continue at the current levels of load shedding for the foreseeable future.”

Carmen Nel, economist and macro strategist at Matrix Fund Managers, says while the shock decline was no surprise given the debilitating impact that intensifying load shedding had on day-to-day life, it was the extent of the contraction relative to the -0.7% to +0.6% consensus forecast range that shocked analysts.

“The positive aspects within this latest data set are that fixed investment and household consumption expenditure were stronger than expected, with reasonable spending on restaurants and hotels, furniture and appliances and clothing and footwear.”

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Technical recession on the cards

Maarten Ackerman, chief economist at Citadel, says it is clear that the economy is taking strain from load shedding and this is paving the way for a technical recession in South Africa.

“Everything is indicating that the first quarter of 2023 will also be negative, due to the amount of load shedding we have now, coupled with the logistical issues faced in our rails and ports infrastructure. This will give us two consecutive negative quarters which by definition is a technical recession.”

GDP growth of 2% in 2022 was not enough to address our structural issues, he says.

“A 2% growth rate does not mean much if you consider that it is not outrunning our population growth and we have been stuck in the low growth environment for the past couple of years.” 

Ackerman says the growth figures announced today means that South Africa was doing worse than it did before the Covid-19 pandemic.

“We are stuck at the economic level of 2018 and that is five years of going nowhere slowly which, again, speaks to the structural issues we face on a daily basis in South Africa.”

He also says that it is encouraging to see that at least household consumption is remaining positive at 0.6%, although there was a decline in the previous quarter.

“It shows that consumers are still maintaining some spending despite struggling with lower take-home pay, low savings, high unemployment and rising interest rates.”

Consumers were still spending on restaurants, household equipment, communications and education, although it is likely that much of that spending was on credit.

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Fixed capital formation most positive statistic in GDP

Ackerman also noted that fixed capital formation is the most positive statistic, with a surprising 1.3% increase for the quarter, the fifth positive in a row.

“This is good news, because this number has been negative more often than it has been positive over the past couple of decades. This trend could pave the way for more sustainable economic growth going forward.”

Service-based sectors mostly contributed to growth, but unfortunately, industries like mining, construction, electricity and manufacturing were all in the red and that is really the strongest job creation side of the economy, he says.