SA not in recession, but picture of stagnant economy remains the same

Though South Africa managed to avoid a recession by managing only 0.1% of growth in the fourth quarter of last year, the overall picture has not changed: the economy remains stagnant amid soft domestic demand and numerous supply-side growth impediments.

The latest preliminary indicators show that real gross domestic product (GDP) increased by 0.6% in 2023, after an increase of 1.9% in 2022.

“The results for the fourth quarter were on par with our expectation of +0.1%, but lower than the consensus forecast of +0.3%,” Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

Agriculture declined 9.7% due to reduced output in field crops, horticulture goods and animal products. Mining was up 2.4% buoyed by increased production of platinum group metals (PGMs), chromium ore, coal, and diamonds.

Contributing to the slight increase in the secondary sector in the fourth quarter compared to the third quarter was manufacturing (+0.2%) and electricity, gas and water (+2.3%), but this was offset by a 1.4% drop in construction.

The tertiary sector was a mixed bag in the fourth quarter, boosted by transport (+2.9%), personal services (+0.9%) and finance (+0.6%), while trade (-2.9%) and government services (-0.6%) contracted.

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Agriculture and trade biggest laggards in fourth quarter

Van der Linde says agriculture and trade were the biggest laggards in the fourth quarter, while transport and mining were the best performers.

“However, we do not foresee any meaningful improvement in the South African economy over the near term as structural constraints together with a high-cost environment weigh on growth prospects.”

He points out that the economic upturn in the fourth quarter was soft following the 0.2% contraction in the third quarter.

“It is evident that the South African economy is lurching from quarter to quarter, unable to produce sufficient job growth and expand the supply of goods and services. Years of chronic underinvestment lies at the heart of South Africa’s growth problem.

“We maintain our view that South Africa entered 2024 with hardly any economic momentum and real GDP growth is expected to pick up only modestly to reach 0.7% this year compared to the consensus forecast of 1.2%.”

He expects that supply-side constraints will continue to undermine growth for most of the year, with the peak impact of tighter monetary policy also likely to still weigh on consumer pockets during the first half of 2024.

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Saved from technical recession, but 0.6% in 2023 totally unsustainable

Prof Bonke Dumisa, an independent economic analyst, says the mere 0.1% GDP economic growth rate saved us from a technical recession, because another negative economic growth rate would have moved South Africa to a technical recession, due to the -0.2% negative GDP growth rate in the third quarter of 2023.

“Two successive negative economic growth rates lead to technical recession. We just have to be content with the 0.6 total annual GDP economic growth rate for 2023, despite that 0.6% being very low compared to our population growth rate which is many times higher than 0.6%. This is totally unsustainable.

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Avoiding recession good news, but bad news for economic growth this year

Prof Raymond Parsons, economist at the NWU Business School, also says the good news is that South Africa narrowly avoided a ‘technical recession’ with a scant GDP growth rise of 0.1% though there were fears in some quarters that the fourth-quarter growth figures might also be negative.

“The bad news is that, on the basis of economic growth now being just 0.6% for 2023 as a whole, the economy is likely to see only about 1% of economic growth this year. This is more or less in line with most recent growth forecasts but is still simply too low to meet South Africa’s socioeconomic challenges.”

He says the further 0.2% decrease in gross fixed capital formation in the fourth quarter remains a red flag. “This confirms the negative trend in private fixed investment in 2023, as indicated by the recent Nedbank Capital Projects Listing survey. Higher fixed investment levels are needed to drive job-rich growth in the period ahead and underscores the importance of investor confidence.”

Parsons says the message remains that these negative trends are reversible and investor sentiment can be strengthened if energy security can be assured, logistical obstacles resolved, and policy uncertainty reduced.

“The more rapidly promised economic reforms can be implemented, the better the growth prospects will be for the economy.”

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2024 expected to be slightly better at 1% GDP growth

Nedbank Group Economic Unit economists Crystal Huntley, Johannes Khosa and Nicky Weimar say the 0.1% growth in the fourth quarter was lower than their and the market’s forecast of 0.3%.

They believe that the economy should fare slightly better in 2024 but warn that the recovery is only expected in the second half of 2024.

“In the first six months, economic activity will likely remain weak, weighed down by the combined weight of continued power outages and transport bottlenecks, soft global demand, low international commodity prices and the ongoing squeeze emanating from high domestic interest rates.”

Thereafter, they say, production and exports should benefit from firmer global demand as disinflation intensifies, major central banks ease monetary policy and China’s fiscal and monetary stimulus takes greater effect.

“At the same time, domestic inflation is forecast to shift down a gear around mid-year, enabling the South African Reserve Bank (Sarb) to start cutting interest rates, which should support real incomes and lower debt service costs, lifting consumer confidence and demand.”

They also expect that government spending will remain positive, but growth in fixed investment is likely to fade in response to the challenging operating environment and subdued growth prospects. Altogether, they forecast GDP growth of about 1% in 2024.

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Subdued growth for 2024

“The growth outlook for 2024 remains subdued, with the upside limited by the country’s energy, transport and water supply woes. While cyclical conditions should turn the corner around mid-year, the strain emanating from soft global demand, low commodity prices and high domestic interest rates will likely intensify in the year’s first half.”

On top of these inhibiting factors, they expect that fiscal policy will become more restrictive and the uncertainty over the outcome of May’s general election and its implications for economic policy will likely undermine confidence.

“We expect economic conditions will remain unfavourable in the first half, probably translating into weaker growth outcomes, before slowly improving off a low base in the second half of the year. Over 2024 as a whole, the economy should fare slightly better than in 2023.”