Recession or not? SA’s economic growth to be revealed

Is South Africa in a recession or not? We will know on Tuesday when Statistics SA announces the gross domestic product (GDP) statistics for the first quarter of 2023. If there was no growth, the country will be in a recession.

A recession happens when a country shows no GDP growth in two consecutive quarters, but economists feel positive that the country will skip the recession.

Meanwhile S&P Global published its May economy-wide purchasing managers’ index (PMI) for South Africa On Monday, showing that operating conditions contracted at the sharpest rate since July 2021.

According to S&P Global, businesses in South Africa suffered a further downturn in operating conditions during May, as load shedding greatly constrained output and contributed to a renewed fall in new business.

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The S&P Global South Africa Purchasing Managers’ Index dropped to its lowest reading in just under two years in May. “At 47.9, down from 49.6 in April, the index pointed to a decline in the health of the private sector for the third successive month. Underlying the downturn was a sharp and quicker contraction in business activity.”

The activity decreased to the greatest extent since July 2021, with falls seen in the industry, construction, wholesale and retail and services sectors. Survey panelists again pointed to load shedding driving the contraction in output.

On the positive side – no recession

On the positive side, companies signaled that improving import supply helped to ease supply side challenges, leading to the softest lengthening of delivery times since December 2019. Companies also remained positive about the future, amid hopes of a pick-up in sales despite concerns about electricity supply. 

The Bureau for Economic Research (NER) at Stellenbosch University says besides rolling blackouts, the Transnet strike, a derailment on the export coal line and an outsized decline in value added by the financial sector contributed to a real GDP contraction in the fourth quarter of 2022.

Although load shedding was even more severe in the first quarter of 2023, the other major constraints on GDP did not repeat and the BER says the available high-frequency monthly Stats SA data does not support another GDP decline.

“Against this backdrop, we expect that real GDP increased by 0.6% compared to the fourth quarter and 0.3% compared to the first quarter of 2022. This is somewhat higher than the Bloomberg consensus of 0.3% compared to the previous quarter. Even if we are correct, it would still mean an incomplete GDP recovery from the 1.3% contraction recorded in the fourth quarter.  

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The Nedbank Group Economic Unit also expects the economy to have performed slightly better in the first quarter despite acute rolling blackouts thanks to higher production by agriculture, mining, manufacturing, transport and communications.

“On the expenditure side, consumer spending and fixed investment probably increased marginally, helping to contain the impact of a further deterioration in the country’s net export position. Real GDP is forecast to have increased by about 0.3% compared to the previous quarter.”

Resilience will fade as load shedding continues

However, the unit says this resilience will fade as the year progresses as load shedding continues, other logistical constraints persist and sharply higher interest rates weigh down on companies and households. 

Absa’s economists say despite the sharp deterioration in rotational power cuts, they believe South Africa narrowly avoided slipping into a ‘technical’ recession in the first quarter. “We forecast real GDP growth of 0.2% compared to the previous quarter.”

The Thomson Reuters consensus is for +0.4% but the range of forecasts is wide, running from -0.6% to +0.6%.

The Absa economists say activity data in the first quarter of the year show that various parts of the economy were quite resilient even as rotational power cuts worsened. “In fact, the final iteration of our high frequency data-based GDP tracking estimate points to GDP growth of 0.8% compared to the previous quarter, suggesting some upside risk to our baseline forecast.

“That said, given the volatility in high frequency activity data and the fact that large parts of the economy have no intra-quarter activity data, uncertainty around our forecast is high.”