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Surprise gross domestic product (GDP) growth of 1.6% in the third quarter of the year left economists and analysts stunned and puts full-year growth prospects for 2022 on the front foot.
But with load shedding keeping the economy under pressure in the fourth quarter and a downturn in global economic productivity in the year ahead, it may be too soon to start celebrating, experts say.
Stats SA published Q3 GDP data on Tuesday (6 December), reporting a 1.6% growth in productivity against market consensus of about 0.4%.
Growth four times higher than expectations was largely driven by increased economic output from the agricultural and farming sector, which enjoyed bumper crops and was less impacted by the sustained load shedding that plagued businesses and households for most of the quarter.
According to Momentum Investments, the surprising growth for Q3 means the country will likely see full-year growth above 2%, perhaps even reaching 2.5%, up from projections of as low as 1.1%.
“After taking into account a firmer-than-expected third quarter figure, we expect growth to average closer to 2.5% in 2022, before slowing to just above 1% next year,” said Sanisha Packirisamy, Economist at Momentum Investments.
Citadel’s Chief Economist, Maarten Ackerman, noted that the GDP figures also put the South African economy back to its Q4 2018 level prior to the start of the pandemic.
“This result was particularly surprising given the headwinds South Africa experienced in Q3, including intensifying load shedding, strikes and global factors that impacted the economy,” he said.
Despite this brighter outlook for 2022, the risks for South Africa are still on the downside, particularly for the fourth quarter, the economists noted.
Momentum expects that the high incidence of load shedding – which has been in effect every day since 10 October – will weigh on the fourth quarter outlook for growth. The Reuters market consensus expectation is for growth to soften to 0.2% in the last quarter of the year, while the SARB anticipates a further slowdown to 0.1%.
Ackerman, meanwhile, noted that although the overall economic data was positive, Household Final Consumption – what local consumers are spending – declined in Q3, indicating that consumers are under pressure. And there are no indications that this will ease up any time soon.
“We are a consumer-based economy, and our consumer spending is down by 0.3%. This tells us that our consumers are under severe pressure due to higher interest rates and higher inflation,” he said.
“Everyone is paying more for their basket of food, services and petrol, and we’re seeing spending cutbacks on food, beverages, furniture and household appliances, equipment, clothing and recreation. Unemployment is at an all-time high, and many consumers are running out of the excess savings that they had built up during the pandemic,” the economist said.
Consumer spending and economic growth are both expected to decline over the next 18 months, Ackerman warned.
Big risks ahead
Meanwhile, prospects for the global economy are also strained, with analysts and economists keeping an eye on a potential global recession in 2023.
Reza Hendrickse, portfolio manager at PPS Investments, said that the global economy is currently on a downswing, and with global growth is decelerating, and financial conditions are still tightening, with developed market economies probably heading toward a recession.
“It would be hard for South Africa to buck the trend under that scenario, so global factors still pose a significant risk to the domestic growth outlook. After all, the South African economy is highly cyclical, given its reliance on global trade and the commodity cycle.”
Momentum, meanwhile, said the negative global backdrop exacerbates persistent local issues, as well as new problems coming to the fore.
“In our view, a dimmer global backdrop, tighter local interest rates, pressure to rein in fiscal expenditure, structurally high unemployment, and energy supply shortages continue to raise notable downside risks to the local growth outlook,” Packirisamy said.
Adding to the downside risks is recent political uncertainty which has crept in following parliament’s damning independent inquiry recommendations on the Phala Phala scandal, rousing uncertainty over President Cyril Ramaphosa’s continued leadership as head of the state, she said.
“This has raised concerns over the continuation of the president’s structural reform agenda and Treasury’s more cautious approach to spending,” the economist said.
“South Africa’s cost-of-living crisis has worsened over the past decade. Real growth in the economy averaged a mere 1% over the past ten years compared to the average rate of growth in the SA population of 1.5% for the same period.
“A high degree of policy uncertainty agitated by the current political storm threatens the pace of economic reforms, posing a downside risk to trend growth in SA,” she said.
Rate hikes incoming
While not the primary determinant for the Reserve Bank’s deliberations on rate hikes, Carmen Nel, an economist at Matrix Fund Managers, said the GDP data does frame South Africa’s macroeconomic state and gives an idea of the implied rate path for the country.
“At a headline level, the economy expanded by 2.3% for the year to September – and even if it contracts in Q4, full-year growth is likely to print around 2.0% – 2.5%,” she said. |This implies a smaller, negative output gap, all else assumed equal, and a slightly higher path for the repo rate.”
“A very likely 50bp hike from the US Fed next week should cement another increase from the SARB in January. The size of the increment is up for debate, as the voting pattern should shift from 75bp versus 50bp to 50bp versus 25b,” she said.
Jeff Schultz, senior economist at BNP Paribas South Africa, said that the GDP numbers indicate a more resilient economy as well as a faster closing of the output gap than what the higher frequency numbers suggest.
“This is likely to have inflationary implications and should keep the SARB in hiking mode, for now, we think,” he said.
“Heightened load shedding into Q4 and 2023, stickier inflation, less supportive commodity prices and a souring global growth backdrop mean that we should expect momentum in activity to slow down sharply from here, and we even see scope for a small negative GDP growth print in Q4 2022.”
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