Recession and stagflation loom in South Africa thanks to…
Against the backdrop of global recession fears, South Africa’s battered economy can hardly escape unscathed.
Indeed, recession and stagflation loom on the horizon in the face of intensifying load shedding, cooling commodity prices, a rand in the ropes and continued state failure.
Even before Stage 6 load shedding was imposed for the first time since 2019, South Africa’s economy was likely tipping into recession – the latest wave of blackouts was just the latest push.
A recession means that an economy has contracted for two consecutive quarters or two consecutive three-month periods.
Public discourse lingo often refers to a “technical recession,” but a recession is a recession, plain and simple. And many commentators still insist on using the nonsensical phrase ‘negative growth’, which puts a ‘positive’ spin on things because it includes the word ‘growth’ when there is none.
And at the moment there is almost certainly no growth in the South African economy and it may be shrinking.
“We forecast the real gross domestic product [GDP] contracted on a quarterly basis in the second quarter and expects sluggish growth in the coming quarters. The possibility of more intense offloading in the third quarter could see the economy slide into recession,” said Jee-A van der Linde, economist at Oxford Economics Africa.
Other forecasts are just a little more optimistic and partly depend on the magnitude of the load shedding.
“Our GDP growth forecast for Q2 is zero – no growth, no contraction. And for Q3 we have a forecast of 0.5% (quarterly non-annualized), but there are now clearly more winds contrary for the third quarter than when we published this figure, so there is a possibility that we will get a recession if the intense shedding persists for a good part of the quarter, ”said Peter Worthington, principal economist at Absa. DM168. “But we believe that Eskom [probably] to be able to de-escalate the stage 4, 5 and 6 load shedding to a much less damaging stage 2, now that an agreement on the pay deal has ended the…strike.
Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank in London, noted that high base effects will also be in play after South Africa’s economy surprised on the upside in the first quarter, when it grew much faster than expected by 1.9% on a non-annualized quarterly basis.
“Given the better than expected momentum in the first quarter, which contributes to a strong basis, and the severity of the load shedding in June, it is possible that we will see a [quarter-on-quarter] contraction in the second quarter,” she said.
Growth in the first quarter brought GDP back to pre-pandemic levels. So while it has since contracted, economic output has fallen back below pre-pandemic levels. It’s a back to the future thing. And a slew of red lights suggests the economy is back to the future.
In April, mining output fell nearly 15% year-on-year, while manufacturing output fell 7.8%. The KwaZulu-Natal floods that month played a starring role in this scene, their impact magnified by years of ANC rot in the region.
Collapse of trust
Unsurprisingly, confidence – which is necessary if consumers are going to consume and businesses are going to invest – has been undermined. The FNB/BER consumer confidence index fell to -25 in Q2 from -13 index points in Q1. To put that into context, the only time it’s been below that in the last three decades plus change was in the second quarter of 2020 when it hit -33 against the wrecking ball that was locked down at level 5 in response to the Covid outbreak.
Consumer confidence has fallen across all income groups, from the growing ranks of the poor, who remain the majority in this deeply unequal society, to the wealthy, who have disposable income and savings.
The BankservAfrica Take-home Pay Index recorded one of its largest annual declines in May, down 6.7%.
“With ever-increasing demands on household disposable income, consumers are likely to feel the pressure in the coming months,” BankservAfrica said.
At the same time, the Absa purchasing managers’ index fell slightly in June to 52.2. But the business activity sub-index was hijacked, averaging just 45 in Q2 from nearly 59 in Q1. This is a strong signal that manufacturing output declined in the second quarter.
In fact, these surveys were all carried out before the Stage 6 load shedding bared its fangs, mainly thanks to the strike of some Eskom employees, who managed to obtain a 7% salary increase from the bankrupt public company.
Rising interest rates
Interest rates are expected to rise further when the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) meets later this month. Since November last year, the MPC has raised its main repo rate from a record high of 3.5% to 4.75%, taking the prime rate to 8.25%, and another hike of at minus 50 basis points is clearly foreseen.
The rapid rise in rates to contain inflation after years of ultra-loose monetary policy in advanced economies is seen as one of the main reasons why so many countries are on the brink of recession.
Consumer inflation in South Africa currently stands at 6.5%, mainly due to soaring food and fuel prices, and is a clear breach of the 3%-6% target range. of the SARB.
A global slowdown will also dampen South African economic activity and has put downward pressure on the prices of key commodity exports such as palladium and iron ore.
But the SARB’s hand is also being forced by the rand, which last week hit its lowest levels against the dollar in nearly two years, falling in tandem with the fragile euro.
The bottom line is that the cost of borrowing for businesses and households is rising at an inopportune time, as South African inflation is hardly the product of demand pressures.
Indeed, with the economy possibly slipping into recession, inflation accelerating and an unemployment rate of over 34%, the South African economy is also falling into a spiral of stagflation. This term is even prevalent in developed economies like Canada, where unemployment rates are at record highs.
It is also depressing that the current levels of load shedding are occurring in an economy that may be shrinking or, at best, barely growing. Let it sink in.
The strike was clearly a contributing factor, but there is no way for Eskom to keep the lights on in a booming economy, let alone one with vigorous economic growth rates. It is a cycle that is simply brutal. The only way to grow the South African economy faster and attract the investment needed to do so is to have a reliable power supply, which is only a given in this second quintile – or ” stage 2″ – of the 21st century.
But a rapidly growing economy with the kind of investment needed to build and operate things like smelters, mines, and factories would completely overwhelm the network and collapse it.
This economy, it seems, simply cannot win. DM168
This story first appeared in our weekly newspaper Daily Maverick 168, which is available nationwide for R25.