Underwhelming GDP growth spells nothing good for rest of 2023

The underwhelming gross domestic product (GDP) growth for the first quarter of 2023 spells nothing good for rest of the year while the economy is expected to hardly grow over the rest of the year.

After Statistics SA announced the GDP data for the first quarter, economic research group Oxford Economics Africa says it forecasts an economic contraction in the second quarter and that South Africa’s economy will hardly grow at all in 2023, with real GDP growth of 0.3% forecast for this year.

“The outcome of 0.4% growth was slightly lower than our estimate of 0.5% compared to the previous quarter and on par with the consensus forecast. Despite intense load shedding during the first three months of the year, economic growth was fairly broad but real GDP was only 0.2% higher than the first quarter of 2022.”

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The group forecasts an economic contraction in the second quarter and that South Africa’s economy will hardly grow at all in 2023.

“The post-pandemic recovery has been slow and uneven, with scheduled power outages also contributing to unsynchronised economic growth through higher energy-related capital imports from the private sector pushing to secure electricity generation capacity.”

Economy stuck for four years

Oxford Economics Africa warns that while the economy has been stuck at current levels for the past four years, debt has accumulated and real fixed investment has declined. Also, the sluggish economic growth, together with the deep contraction in agriculture, do not bode well for employment growth in the first half of the year.

The Nedbank Group Economic Unit also expects the modest bounce in the first quarter to be short-lived.

“Load shedding intensified into the second quarter, weighing on confidence, disrupting operations, driving up production costs and eroding profits and income.

“These pressures, combined with the downturn in global growth and commodity prices, will hurt production and exports even further in the quarters ahead. The drag emanating from the country’s negative external position will likely intensify, with exports falling short of imports.”

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The unit also expects growth in consumer spending to slow due to the squeeze on household incomes emanating from sticky inflation and sharply higher interest rates, while government spending will probably increase further, reflecting higher-than-expected outlays on public sector wages.

“The biggest surprise is the sharp drop in value added by agriculture, forestry and fishing, which contracted by 12.3% compared to the previous quarter, shaving 0.4 percentage points off GDP growth.

“Although the National Crop Estimate Committee projected that this year’s summer harvest would be about 4% higher than last year, Stats SA reported that output of field crops and animal farming contracted, undoubtedly derailed by the severe power outages.”

Water and electricity adds no value to GDP

Unsurprisingly, the unit says, value added by electricity, gas and water contracted by 1% compared to the previous quarter, caused by lower electricity production and reduced water consumption.

“The drop in water use probably also reflects the impact of load shedding, worsened by crime, which resulted in extended water outages in many urban areas.”

The unit expects significant drag from a much weaker external position, with exports falling short of imports.

“At the same time, the slowdown in domestic demand will deepen. Household confidence is expected to remain fragile as income growth slows, sticky inflation erodes purchasing power and sharply higher interest rates drive up debt service costs and subdue demand for credit.”

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Inflation and interest rates will reduce the funds available for discretionary spending significantly and the unit says households will also become more cautious, fearing that the electricity crisis and the weak economy could threaten job security and undermine earning prospects.

No outlook for consumers or companies to spend more

“These concerns are likely to contain consumer spending throughout 2023. Meanwhile, private firms are likely to become more reluctant to undertake significant capital expenditure.

“With profits buckling under the pressure of load shedding, growth prospects evaporating and risks escalating amid heightened geopolitical tensions between the US and SA over the government’s close ties with Russia, more companies are likely to focus on cost-cutting, which will probably entail scrapping or postponing large capital expenditure plans.”

The unit says as a result, it expects growth in fixed investment activity to slow, although downside will still be contained by increased activity in the renewable energy sector and moderately higher outlays on infrastructure by general government.

Government spending will probably increase further, driven by the higher-than-budgeted wage settlement reached with public sector unions earlier this year.  

“At this stage, real GDP is forecast to contract in the second quarter, before stabilising somewhat in the year’s second half. Over the full year, GDP growth is forecast to slow down to a crawl of 0.1%. Given the severity of the country’s challenges, there is still a strong probability that the economy could contract over 2023 as a whole.”