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

The new gross domestic product (GDP) data is not good news for consumers, with the latest fall in real GDP meaning that the size of South Africa’s economy in the second quarter was smaller than what it was before the pandemic.

“A contracting economy means potential wage and job cuts on the horizon and with the likelihood of a further interest rate hike coming at the end of September, that means even less disposable income.

“Therefore, if you even still have a belt left, I am afraid that means more belt tightening ahead,” says Hayley Parry, Money Coach and facilitator for 1Life’s Truth About Money.

The statistics from Statistics SA show that real GDP contracted by 0.7% in the second quarter compared to the first quarter but was 0.2% higher than in the second quarter of last year.

The heavy flooding in KwaZulu Natal in April and intense power outages towards the end of the first half of the year were the main drivers behind the slump.

Parry says although household expenditure was up marginally (0.6%), consumers spent less on items such as alcohol, tobacco and clothing.

Hopefully the fuel price reduction tonight and a slowing of food price inflation will provide households with a little breathing room as they have clearly already cut consumption on discretionary expenditure.

“As depressing as this economic news is, focusing on the things you can control when it comes to your personal finances is far more productive and empowering than thinking about the things you have no control over. My advice to anyone feeling the heat now is to empower yourself with a financial education and learn how you can budget smarter not harder, get out of debt and put some money aside for a rainy day.”

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We need new plans and more jobs

Prof. Jannie Rossouw, visiting professor at the Wits Business School, says the slump in GDP is a major disappointment. “There was no sign of the bounce expected after pandemic restrictions were removed.”

He says it is time for government to move away from their old socialist plans and make new plans that will create jobs. “The department of trade, industry and competition must stop regulating everything that moves and leave it to the private sector to create jobs. Government must only ensure that we have power and that municipalities work.”

Research group Oxford Economics Africa says the figure was expected. “After rising to pre-pandemic levels in the first quarter, although it took eight quarters for that to happen, the latest contraction means that the South African economy is once again smaller than what it was before the pandemic.”

The Statistics SA data shows that more than half of the economic industries have not yet recovered from the pandemic. “Looking ahead, global economic conditions have deteriorated in recent months and the picture for emerging markets, including China, is generally worsening.”

The group says although initial high frequency data suggests an improvement in economic activity during the third quarter, the risk of loadshedding remains high and will continue to undermine the South African economy.

“Despite decreasing, domestic fuel prices remain elevated and will throttle economic activity in the second half of the year, while a real income squeeze from higher inflation and further interest rate hikes should also dampen economic growth.”

The group believes that a recession might be avoided this year, although it is probable and forecasts sluggish growth of around 0.2% in the third quarter, with an expectation that the economy will grow by 1.8% in 2022 instead of 1.9% as previously thought.

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Weak performance across most sectors

Tertia Jacobs, treasury economist at Investec, says the contraction was expected considering the slower global GDP growth, such as in China where the GDP contracted by 2.6% owing to a protracted Covid-19 lockdown in Shanghai and the local floods which damaged infrastructure and load shedding.

The performance of the primary sector was also very weak. For example, mining and manufacturing production contracted and activity in the construction sector has not shown any signs of turnaround, having contracted for five consecutive sectors.

Frank Blackmore, lead economist at KPMG, says the contraction was expecting considering that load shedding was recorded on around half of all business days in the second quarter.

“The impact of this load shedding led to a contraction of manufacturing output by 5.9% and was accompanied by the increase in the prices of fuel and food which led to higher inflation and interest rates that reduced output across seven of the ten economic sectors.”

Only the finance, real estate and business sectors, as well as transport storage and communication sectors showed positive growth, while the personal services sector showed no growth. “Although the growth in the second quarter is not good news, we still think that GDP growth for the 2022 year will be positive at just under 2%.”

ALSO READ: Infrastructure: SA’s best weapon to combat low GDP, poverty and unemployment

Limited expansion in capacity

Carmen Nel, economist and macro strategist at Matrix Fund Managers, says the 0.7% contraction was a surprise as a bigger slump was expected. “For now, this contraction is expected to be once-off, but the details reveal limited expansion in capacity.

“Construction remains under pressure and unit labour cost growth has reaccelerated in the face of falling productivity. This means that the economy’s potential remains constrained, which could limit the disinflationary pressure from the output gap.”

She says the South African Reserve Bank does not believe the output gap is too negative and this release was an upside surprise relative to the Reserve Bank’s forecast.

“Even so, this release on its own is unlikely to lead to a more hawkish response given that inflation has most likely peaked and global evidence of easing input cost pressures.”