The battered SA economy still has some fight left, with stronger growth now expected

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Battered and kicked in the teeth, repeatedly – the South African economy still has some fight left.

Despite a host of challenges – including load shedding, Transnet woes and a rand crash due to the Lady R diplomatic crisis – the economy may have been stronger in the second quarter than in the first.

This was due to mining and manufacturing, in particular.

Key growth areas

Mining production was 1.5% higher in the second quarter than the first, thanks to increased production of gold and platinum group metals.

“A sluggish greenback combined with geo-political tensions has supported the safe-haven, precious metal, while PGMs have benefitted from robust global auto sales in the first half of 2023,” says Investec economist Lara Hodes.

The manufacturing sector grew by 2.3% from the first to second quarter, with seven of the 10 manufacturing sectors larger than a year before.

And while retail sales have been on a declining trend, wholesale trade sales grew by 1.6% in the second quarter. Also, the sales of passenger vehicles climbed by almost 10% in the same period, Old Mutual Group’s Chief Economist Johann Els points out.

GDP growth

While there are still many moving parts, the current data points to GDP growth of perhaps 0.7% in the second quarter, from only 0.3% in the first, he estimates.

“The economy is obviously in a very weak state, but there appears to be a disconnect between the PMIs [Purchasing Managers Indices, surveys among companies] and actual production,” says Els. PMI survey results have been very weak over recent months.

Absa’s economic team says the economy’s resilience has been stronger than expected, with big businesses adapting faster to structural problems. “Many big businesses seem to have insulated themselves from load shedding to some degree by installing their own generating capacity.”

In addition, there was a sharp decline in load shedding in June, which saw the lowest monthly load shedding since August 2022.

The Absa team now expects growth of 0.7% for 2023, from 0.3% before. The SA Reserve Bank also recently lifted its forecast from 0.3% to 0.5%.

Els expects that the economy could well grow by more than 1% in 2023, which was also its average growth rate between 2015 to 2019. But the average growth rate could be pushed to between 2% and 2.5% over the next five years amid a gradual end to the electricity crisis and accompanying investment, he believes.

Electricity resilience

The strong move to self-generation and improvement in production efficiency is keeping the economy resilient, says Els – who points out that South Africa is now using 25% less Eskom energy to generate the same GDP as in 2000. Investment in renewable energy is also stimulating the economy.

According to government, there are more than 13 300MW of private renewable energy projects in the first step of securing grid connection.

But Absa warns that rail and port woes will continue to hit various businesses, especially particularly bulk commodity exporters – and this in turn will hurt jobs, taxes and forex reserves. In addition, it is concerned about water problems, which recently surfaced in Gauteng, and deteriorating municipal services.

Consumer joy

Also, the South African consumer is not in a happy place. Consumer spending accounts for 65% of demand-side GDP, and salaries have not kept up with rocketing food and other prices. Meanwhile, aggressive interest rate hikes are hurting spending. The monthly payments on a new R2 million home loan are now almost R6 200 more expensive than in November 2021.

This has triggered a rise in bad debts. More than 70% of new credit applications are now being turned down, according to the National Credit Regulator.

Interest rates should be lowered from March next year, with Nedbank expecting rates to be lower by a full percentage point in 2024, which would lower the repo rate to 7.25%.

But Absa thinks that global interest rates will likely remain higher for longer, and due to “South Africa gradually becoming a riskier investment amid weak growth and deteriorating public finances”, it expects rate cuts will stop at 7.50%.

However, Els says fears of a fiscal crisis in South Africa may also be overblown, given that most estimates are based on 0.0% to 0.5% GDP growth for 2023.

Statistics SA will announce the second-quarter GDP data on 5 September.