- For South Africa, there may be no growth in 2023. Indeed, the country is likely to have slumped into a technical recession in Q1 2023.
- Absa Group survey shows South Africa’s power cuts are hitting the manufacturing sector hard.
- A sustained drop in factory output may result in job losses, eroding the economy further.
South Africa’s manufacturing activity continued to contract in April, albeit at a slower pace than in the preceding two months. The seasonally-adjusted Absa Purchasing Managers’ Index (PMI) hit 49.8 points in April 2023, up from 48.1 points in March. It, however, remained below the critical 50-point mark for the third straight month, indicating contraction in the sector.
This modest improvement was attributed to companies building up their inventories. Absa noted that the manufacturing sector faced yet another challenging month in April, with power cuts hindering output.
Eskom, the struggling state-owned utility, has imposed almost daily electricity cuts this year, following record outages last year.
Impact of factory activity contraction on the economy
April’s contraction in factory activity is likely to have an adverse effect on South Africa’s economy. Production and new sales orders in the country’s manufacturing industry have been ruffled by power cuts. The resultant weakened demand is now leading to significant drop in business activity.
Further decline in factory activity may result in job losses, exacerbating the strain on the economy. Civil unrest and tighter Covid-19 curbs in July 2021 contributed to a decrease in manufacturing activity in South Africa.
It is, therefore, imperative to address the root causes responsible for the factory activity contraction to prevent further harm to the economy.
South Africa economy April 2023
The South African economy has faced numerous challenges, including geopolitical tensions, climate change, and acute power crises.
These challenges have caused the economy to struggle and may continue to do so in 2023. Urgent action is necessary to address supply-side constraints. This will among others ensure stable electricity access and freight and logistics improvements to power future growth.
However, the current situation indicates that there may be no growth in 2023. The country could already be in a technical recession in Q1 2023. Worse still, the possibility of a flat to no growth is a real possibility.
The National Treasury’s baseline forecast expects moderate deceleration of growth to 0.9 percent in 2023. Separately, the South African Reserve Bank forecast is less optimist at 0.3 percent.
Absa’s PMI also expects a meagre 0.1 percent growth for 2023, with a projection of a current account deficit bulging from -0.4 percent of GDP in 2022 to -1.8 percent of GDP in 2023 and -2% in 2024 due to lower net exports, easing commodity prices, and higher power-related imports.
Stable electricity access, improving freight and logistics
Although fixing the energy crisis may increase the current account deficit, it may also improve growth prospects over the medium term.
South Africa has been beset by a range of disruptions that have made it difficult to achieve sustained economic growth. If these challenges persist, the economy will continue to struggle, particularly in 2023.
To spur growth, addressing supply-side constraints by ensuring stable electricity access, improving freight and logistics remain vital. After a strong economic rebound in 2021, real GDP growth declined from 10-year high of 4.9 percent to 2 percent last year.
According to Statistics South Africa (StatsSA), the South African economy has expanded by only 0.3 percent since the outbreak of the pandemic (between 2019 and 2022). This was a fraction of its population growth over that period. Some industries—most notably construction, mining, and manufacturing—are still lagging behind pre-pandemic levels of output.
Mining and manufacturing industries worst hit
The power woes (load shedding, in particular) currently faced by the South African economy have spared no industry. At the moment, the extractive and the manufacturing industries are among the worst affected. Last year alone saw 200 days of load shedding, with Q4 2022 being the worst on record (only two no-load shedding days in the quarter of 92 days). The three-month period to 2023 has proven to be worse: only one day of no load shedding and longer blackouts.
This has translated into lower mining (–1.9 percent) and manufacturing production (–3.7 percent) for January 2023 when compared to the same period the previous year.
Domestic freight and logistics bottlenecks, together with flatter commodity prices, have added insult to injury, further undermining growth prospects in the mining sector.
Retail sales, GDP and growth prospect
Retail sales were down by –0.8 percent in January YoY, and they are also likely to fall further. This is mainly because household finances continue to remain under pressure. This is the result of the ongoing cost-of-living squeeze, high inflation, pricier credit conditions, and load shedding.
In the immediate term, the growth outlook for South Africa is bleak, and a scenario of flat to no growth is a real possibility for 2023. The country could already be in a technical recession in Q1 2023 (defined as two consecutive negative quarters of growth).
The National Treasury’s baseline forecast, released on 22 February 2023, expected a moderate deceleration of growth to 0.9 percent in 2023. The forecast by the South African Reserve Bank (SARB) toward the end of January 2023 was less optimistic, at 0.3 percent.
This figure is based on the key assumption of over 250 days of load shedding, and with longer blackouts this year. The SARB believes, this will likely shave off up to two percentage points of GDP growth this year. The bank marginally revised down the growth outlook to 0.2 percent at the end of March.
National utility intervention leads to deterioration in debt
The International Monetary Fund (IMF) slashed its 2023 forecast to a meagre 0.1 percent on 23 March 2023 from 1.2 percent in its January update.
In February 2023 Budget, South Africa’s Minister of Finance announced the country’s commitment to continue with fiscal consolidation efforts. This startegy involves controlling the growth of consumption expenditure while reducing the budget deficit, without the need for tax hikes, infrastructure investment cuts, or impacting the social wage.
The government’s priority remains to allocate 60 percent of noninterest expenditure towards the social wage over the next three years.
Efficient and effective tax administration and collection have resulted in revenues exceeding last year’s budget expectations.
As a result, the consolidated budget deficit is projected to decrease to 4.2 percent of GDP in 2022-23, 4 percent in 2023-24, and 3.2 percent in 2025-26. This, despite an average annual increase of 4.5 percent in consolidated expenditure over the same period. Further, a primary budget surplus is expected for 2023-24.
Increased government borrowing and public debt
However, the government’s decision to provide debt relief to utility Eskom will lead to a deterioration in the country’s gross debt-to-GDP ratio. The government will take on over 50 percent of Eskom’s debt over the next three years to provide the utility with the necessary resources to unbundle and invest in new power-generation capacity and maintenance.
This decision will result in increased government borrowing and public debt. Despite the expectation that debt levels would stabilize as early as 2022-23 following a revenue windfall, this is now expected to occur in three years’ time at 73.6 percent of GDP in 2025-26.
Taking on the debt of the struggling utility will also result in a rise in debt-service costs, which remain among the fastest-growing expenditure items in the country’s budget in the medium term. This situation will continue to crowd out other expenditure items.
Surviving a turbulent business climate
South Africa is facing a potentially challenging 2023, with both domestic and global risks threatening its already dire growth outlook. To turn the situation around, the country needs to address self-imposed challenges such as mismanagement, maladministration, and weak growth.
One significant challenge that South Africa must deal with quickly is its greylisting by the Financial Action Task Force. Unchecked, this could bring adverse effects on the country’s reputation and foreign investment outlook.
However, the country’s globally integrated financial system is likely to help it bounce back from the greylisting quickly.
In addition, a slowdown in key trading partners could have a more pronounced impact than expected, leading to lower business confidence and tighter financial conditions.
Inefficiencies in state-owned entities
Nevertheless, South Africa’s financial system is resilient, and the direct repercussions are likely to be limited. To support growth in the medium to long term, the government is taking steps to address the power outages. Already, it is investing in infrastructure to significantly reduce supply-side constraints.
However, to avoid the risks of slow growth for longer, South Africa must take urgent action to eradicate inefficiencies in state-owned entities in transport and logistics sector.
Implementing growth-enhancing structural reforms, rooting out corruption and mismanagement, and building confidence among consumers, businesses, and the broader international investment community is essential to unlocking investment and new opportunities for growth and job creation.