Wealth management specialists Citadel’s Chief Economist, Maarten Ackerman, unpacks the disappointing Q2 2022 GDP figures, citing South Africa’s energy and flood woes, but says ‘all is not lost’.
The second quarter (Q2) 2022 Gross Domestic Product (GDP) data released today by Statistics South Africa shows a decline of 0,7% quarter-on-quarter – a result that, if repeated in the third quarter, will mean that the country has entered a “technical recession”, says Citadel Chief Economist Maarten Ackerman.
“Not only is the local economy currently negatively impacted by global events, such as a strong slowdown in economic activity in most of our trading partners, but local issues, such as record levels of loadshedding and recent floods in KwaZulu-Natal have clearly had a detrimental impact on growth. ” says Ackerman.
Year-on-year, GDP increased by a disappointing 0,2%. “The movement was so close to zero, it was basically flat. Although we recovered to pre-pandemic levels in Q1 this year, we have now slipped back to pre-pandemic levels. In rand billions, the South African economy remains at 2018 levels which speaks to the structural issues holding back our growth. While the economy is stagnating, the population keeps on growing which adds to the unemployment and social issues we are dealing with,” explains Ackerman.
HOW SA’S INDUSTRIES FARED IN Q2 2022
In total, seven industries contracted in the second quarter of 2022. Ackerman says the primary sector was the hardest hit, contracting by 5,1%. As the biggest negative contributors to this contraction, the previously booming agriculture and mining sectors reported decreased production of animal products, gold, coal and diamonds, due to power supply and export difficulties. “This is unsurprising as the sector is heavily dependent on energy, which was a scarce commodity in Q2 due to loadshedding,” says Ackerman.
The secondary sector was also significantly impacted by loadshedding, contracting by 4,8%. “The biggest production delays were reported in the petroleum, chemical products, food and beverages manufacturing sectors, which declined by 5,9%. The 1,2% decline in the collective electricity, gas and water industry growth rate was driven by the decrease in electricity consumption.”
It was only the tertiary industry that printed a positive number (up 0,7%) for the quarter. “This happened despite the 1,5% contraction by both wholesale and retail trade which recorded a decrease in economic activity. If we look at the sectors that are slightly less energy dependent such as transport, storage and communication (which grew 2,4%), finance, real estate and business (which grew 2,4%), as well as personal services (which grew 0,1%), most of them made a positive contribution over the quarter. This clearly shows the severity of our energy crisis and how quickly we need to solve it,” explains Ackerman.
CONSUMERS ARE STRETCHED BUT STILL SPENDING
“It’s encouraging to see that household consumption grew by 0,6% quarter-on-quarter and is reasonably stable despite high unemployment and inflation printing at a 14-year high,” says Ackerman. While the collective trade, catering and accommodation industries saw a 1.5% contraction in Q2, it was encouraging to see 6,2% growth reported by the restaurant and hospitality sectors. “This is positive news for tourism as we head towards the festive season. The 0,6% increase in transport is mostly attributed to the fuel increases we experienced in Q2 as households had to reprioritise.”
Imports increased by 5,6% in Q2, while exports only increased by 0,3% showing a correlation between South Africa’s enduring logistical hurdles and the income it derived from exports, says Ackerman.
INVESTMENT REMAINS POSITIVE FOR THREE CONSECUTIVE QUARTERS
The biggest positive from the Q2 GDP results was that South Africa had a third consecutive positive quarter for Gross Fixed Capital Formation (GFCF) which, over the past decade, has had more negative quarters than positive ones.
“It’s very encouraging to see this trend emerging and it seems to be getting stronger. This is in line with some of the other fixed investments we see in the economy. The positive performance of our GFCF is clear evidence that the economy and companies are reinvesting back into the economy and increasing the future capacity. Investments in things such as transfer costs, machinery and other equipment, non-residential buildings and other assets are encouraging and usually pave the way for better and stronger growth in the long-term,” says Ackerman.
In summary, Ackerman believes the tough quarter the economy experienced due to the country’s electricity challenges may resolve in time. “Consumers seem fairly okay in a tough environment, and GFCF remains positive. Hopefully the investment in capital expenditure is paving the way for the economy to grow sustainably in future. The government’s acknowledgement of the country’s energy crisis, and the Presidency’s move to lift caps on private (captive) power generation by big manufacturers and mines, will hopefully help to accelerate the country’s transition to a more sustainable green energy future. It’s encouraging to see a record number of renewable energy projects in the pipeline and one can only hope this attracts more foreign direct investment,” concludes Ackerman.