Various economic shocks derail solid momentum at start of 2022

The much better than expected real gross domestic product growth numbers for the first quarter of 2022 have unfortunately been marred by high-frequency figures and the decline in business confidence during the second quarter, derailing the momentum built up at the start of the year.

While the South African economy expanded by 1.9% compared to the first quarter of the year, well above expectations for growth of 1.2%, growth, returning the real gross domestic product (GDP) to its pre-pandemic size, there was a stark divergence between sectors in the first quarter, according to the Bureau for Economic Research at Stellenbosch University.

Manufacturing (up 4.9%) and trade (up 2.1%) continued to recover after the sharp contraction in the third quarter of 2021, while personal services (1.1%) and finance (1.7%) also showed strong recovery.

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Mining and agriculture down

However, mining (-1.1%) posted a third consecutive quarterly contraction, while agriculture grew by just 0.8% and construction (-0.7%) continued to lag the rest of the economy for the fourth consecutive quarterly contraction, remaining at more than 20% below its pre-Covid level.

According to Stats SA’s activity data for April, the economic shocks of flooding in KwaZulu-Natal, stage-4 load-shedding, strikes and issues with rail networks saw mining production decrease by 14.9% year-on-year, much worse than expected.

The largest drags on growth were PGMs (-22.6% y-o-y and shaved off 5.8%pts), coal (-14.7% and -3.8%pts), gold (-27.8% and -3.6%pts) and manganese ore (-10.4% and -1.1%pts). April was the first full month of the pay strike at Sibanye-Stillwater’s gold operations, while seasonally adjusted total mining production decreased by 4.3% month-on-month in April.

The BER notes that despite the significant decline in production, mineral sales only decreased slightly by -0.8% year-on-year. Coal was a significant contributor, soaring by 76.8% and contributing 11.2% points as the coal price traded around three times higher in April than a year ago.

April was also not a good month for manufacturing production, which declined by 7.8% year-on-year in April. According to the BER the largest negative contributions were from motor vehicles, parts and accessories and other transport equipment which declined by 28.6% and slashed off 3.3% percentage points, partly due to the flooding and closure of the Toyota factory in KwaZulu-Natal.

The BER also notes decreases in the manufacturing of petroleum and chemical products (-10.3% and 2.2% percentage points), food and beverages (-3.7% and -0.9% percentage points) and metals and machinery (-4.4% and -0.9% percentage points).

Seasonally adjusted manufacturing production fell by 5.4% in April in line with the Absa PMI which fortunately, suggests a recovery in May.

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Business confidence also down in another economic shock

In line with the poor activity data for April, the RMB/BER business confidence index also suggested the economy was under renewed pressure in the second quarter with confidence decreasing to 42% from 46% in the first quarter due to notable declines in two out of the five sectors.

Manufacturing confidence decreased by 14 points to 29% and sentiment of new vehicle dealers by 25 points to 29%.

Confidence for these two sectors is now well below the long-term average. However, on a positive note, the BER says building contractors turned decisively more upbeat, while confidence among retailers and wholesalers remained largely unchanged at relatively high levels.

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Global economic outlook

On the global stage, economic headlines are still dominated by surging inflation and how this is forcing the hand of major central banks to raise interest rates more aggressively.

The BER says the key event last week was the outcome of the European Central Bank’s (ECB) monetary policy meeting, that stated that the next increase in September could be more than 25 basis points.

Financial markets were caught off guard by this notably hawkish statement that explained this course of action would be necessary should ECB staff projections continue to show that Eurozone (EZ) consumer inflation will remain above the ECB’s 2% target through the forecast period (to 2024).

US consumer inflation data once again surprised on the upside, fanning fears that the US central bank (Fed) will need to continue with more aggressive policy rate hikes. The BER says the US consumer inflation rate unexpectedly accelerated to 8.6% year-on-year in May (+1% month-on-month), the highest rate since 1981.

Once again, inflationary pressures weighed on consumer sentiment, with the preliminary University of Michigan consumer sentiment index plunging to an all-time low of 50.2 points in June from 58.4 in May.

This time last year, the index stood at 85.5 and the current level is comparable to the trough of the early 1980 recession, the BER said.