Latest GDP numbers: SA ducked self-induced technical recession, but…

The latest gross domestic product (GDP) numbers show South Africa ducked a self-induced technical recession, but there is pessimism that it will not last.

The South African economy beat market expectations by rebounding in the third quarter with real GDP restored to above pre-pandemic levels.

The data is undoubtedly positive and probably means that the economy will grow by more than 2% this year, although we have learnt by now that one good result does not constitute a trend with the stop-and-go growth in the country this year.

Eight out of 10 industries recorded positive growth on a quarterly basis, with the agricultural, finance and transport sectors contributing the most to overall growth.

The economy rallied by 1.6% in the third quarter compared to the third quarter of 2021 after a 0.7% decrease in the second quarter compared to the first.

Research group, Oxford Economics Africa says this outcome far exceeded its expectations and also trumped the consensus forecast of 0.6% for quarter-on-quarter growth.

“It appears that the economic impact of intense load shedding during that quarter was less severe than anticipated, as the backward-looking data also shows that real GDP rose by a staggering 4.1% compared to the third quarter of 2021.”

ALSO READ: Stats SA: GDP increases by 1.6% in third quarter of 2022

Households taking strain

The group points out that there is increasing evidence of households taking strain as a result of elevated costs for goods and services, including higher interest rates.

“A deeper look at the numbers also gives some cause for pessimism: an inventory build-up would have provided a temporary boost and could actually weigh on future production if stocks do not diminish, while the significant showing by the exports sector is unlikely to persist given commodity price developments and a looming global recession.”

Labour strikes and sporadic power outages, together with fresh new political uncertainty, do not point to a conducive business environment, the group says.

“Although we will revise our 2022 GDP forecast higher, we continue to expect overall growth of around 1% in 2023, with risks skewed to the downside.”

Reza Hendrickse, portfolio manager at PPS Investments, on the other hand says given the upside surprise, there is a good chance 2022 growth will exceed the Reserve Bank and National Treasury’s sub-2% expectation.

“The primary sector drove growth to a large extent, particularly in agriculture, while increased mining production also contributed. Within the secondary sector, which also grew, construction and manufacturing were the main drivers, although electricity segments detracted slightly. The tertiary sector showed modest growth, driven mainly by transport and finance-related business activity, while personal services activity contracted.”

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

ALSO READ: SA’s 0.7% GDP decline means possible job, wage cuts on horizon

Subdued conditions ahead for GDP

“Forward-looking data, such as PMIs and confidence measures, also suggest subdued conditions ahead, with electricity availability still a major headwind. The other significant challenge we face is that the global economy is currently on a downswing.”

Global growth is decelerating and financial conditions are still tightening, with developed market economies probably heading toward a recession and South Africa will find it hard to buck the trend as global factors still pose a significant risk to the domestic growth outlook, she says.

Carmen Nel, economist and macro strategist at Matrix Fund Managers, also says the upside surprise was largely due to a strong expansion in agriculture amid another bumper harvest across various grains.

“The positive aspect was that restaurants and hotels did well, most likely reflecting the ongoing recovery in inbound tourism, particularly with the currency being very competitive globally.”

Nel says while the data reveals some resilience in production and external demand, it points to a consumer who is feeling the pinch. Therefore, it should have nuanced implications for monetary policy.

“At a headline level, the economy expanded by 2.3% for the year to September and even if it contracts in the fourth quarter, full year growth is likely to be around 2% to 2.5%, which implies a smaller, negative output gap, all else assumed equal and a slightly higher path for the repo rate.

Jeff Schultz, senior economist at BNP Paribas South Africa, says the expenditure side data is more telling of how best to interpret the data which shows household consumption spending actually contracting by 0.3% compared to the previous quarter on smaller non-durable goods purchases as higher inflation eats into disposable incomes.

“The numbers indicate a more resilient economy in the third quarter 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 Sarb in hiking mode for now. However, the details highlight some cracks emerging in the outlook for consumers.”

ASLO READ: GDP increase is good… but Eskom dimming the optimism

Challenges to growth

Heightened load shedding in the fourth quarter 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 the fourth quarter, he says.

Maarten Ackerman, chief economist at Citadel, says South Africa narrowly escaped a self-induced technical recession thanks to the strong GDP figures released on Tuesday, but this is no guarantee that the country would avoid a downturn in 2023.

“Seen together, these results bring the South African growth rate over the past year to about 4.1%, which is a very strong number considering current conditions. However, we need to remember that this comes off a low base and local and global headwinds experienced right now and early next year could still bring on a recession in 2023.”

The Congress of South African Trade Unions (Cosatu) spokesperson Sizwe Pamla also calls the data encouraging, but says the country remains stuck in the reality of a stagnant economy that still does not have a reliable electricity supply.