South Africa’s economy probably grew in the second quarter of 2019, but it could hardly have done worse. In the first quarter, load shedding torpedoed any prospects for decent overall growth in the year. The economy shrank 3.2% in Q1, the worst performance since the global financial crisis more than a decade ago.
The big difference between the two quarters was probably load shedding. Eskom somehow managed to keep the lights on in the second quarter, allowing businesses to generally function normally. This simply underscores the critical importance of a reliable supply of power.
Based on the data that has filtered in from the period, economists expect that the economy managed to eke out some growth between 1 April to 30 June, thus avoiding the dreaded “R” word as two straight quarters of contraction signal a recession. (Some people annoyingly refer in this regard to “negative growth”, a magical concept with no basis in reality. Something is either growing or it’s not).
But that’s just about the best we can hope for at the moment — avoiding a recession. That is no reason to raise a glass.
“There is a strong likelihood that a recession was avoided, albeit off a very low base…manufacturing production, as well as retail and wholesale trade sales, rebounded in Q2 following notable contractions in all these sectors in Q1. Electricity production likely also recovered following the severe load shedding in Q1. A rebound in Q2 GDP should not come as a big surprise,” Jana van Deventer, an economist at financial consultancy ETM, told Business Maverick.
For Peter Attard Montalto, the head of capital markets research at Intellidex, the real number from Q2 was the jobless data, which showed unemployment of 29%, its highest in a decade.
“We are likely to see a growth print of around 1.8% or so and as such no recession, but this completely misses the point. The unemployment numbers for the quarter tell the real story…As such the hype of no recession should be rejected and instead, versus such an incredibly low base in Q1, this kind of print should be seen as quite worrying,” he said.
Among other things, it means the economy is still lagging behind population growth, so South Africans are still getting poorer.
The overall growth estimates for 2019 are poor. In July the International Monetary Fund slashed its SA GDP growth forecast to 0.7% for 2019 from 1.2%, and to 1.1% for 2020 from a previous forecast of 1.5%. This comes after growth in 2018 of just 0.8%. The economy has not managed to expand more than 2% since 2013.
Economic growth in itself is not a panacea for South Africa’s economic woes — an economy can expand without generating meaningful job creation (a concept called “jobless growth”), and the benefits of growth are never going to be evenly spread.
But it is also true that job creation is not really possible without economic growth. Developing economies such as China’s which have greatly reduced poverty have done so thanks largely to rapid rates of growth. A bigger economy also means higher tax revenues for the government, and a fast-growing one serves as an attraction for the foreign capital South Africa badly needs for investment, given the low domestic savings rate.
Growth, or the lack thereof, also focuses the minds of the rating agencies. Moody’s remains the only one to rate South African debt as investment grade. There are widespread expectations that it is set to pull the trigger. The dire growth outlook will be one of the factors behind that decision, which will raise borrowing costs further. South Africa may have dodged a recession, but there are other missiles on the way which will likely land painfully on target. BM