There was a wave of optimism in the first three months of 2022 when South Africa’s economy opened up under substantially eased Covid regulations, allowing unfettered public life to return after two years. 

This helped South Africa’s more than R5-trillion economy to grow by 1.9% in the first three months, recovering back to pre-Covid levels.  

There were positive developments in President Cyril Ramaphosa’s economic reform agenda, which seeks to boost the economy and private-sector investments. The government raised R14.4-billion by auctioning radio spectrum to telecommunications companies for the first time in 17 years, which will ultimately improve the quality of communications and ease mobile data costs.

The government opened up the sixth round of procuring more electricity from renewable sources to ease the energy crisis. And Transnet’s creaking rail and freight operations will open up, allowing the private sector to participate and improve efficiency.

But, from April, all the economic momentum and optimism faded. Eskom’s rolling blackouts intensified. Heavy rains flooded parts of KwaZulu-Natal and the Eastern Cape, damaging key economic sectors such as retail, agriculture, manufacturing and logistics.

The cost-of-living crisis worsened, with unrelenting increases in petrol and food prices. The Reserve Bank raised interest rates, trying to tame consumer inflation that is at its highest (7.4%) in 13 years. This further eroded the disposable income of consumers and their ability to spend, limiting the flow of money into the economy. This is also the story playing out across the world.

In the doldrums

Economists are now pencilling in a contraction of South Africa’s overall economic activity from April to June, the second quarter. The consensus is for the economy to shrink by between 0.8% and 1% because activity in several sectors has declined, as confirmed by data published by Statistics South Africa in recent days. 

Mining production fell for a fifth straight month in June by 8% compared with a year ago. Manufacturing contracted for the fourth month in a row in June, falling by 3.5% year-on-year. Retail sales also fell by 2.5%, the biggest decline since January 2021.

Rolling blackouts, which intensified to stage six in June, meant that mines and factories couldn’t increase productivity, resulting in lower output. Both sectors are still fragile, recovering from the floods.

The global economy is also not supportive of South Africa’s mining and manufacturing. The rise of interest rates and inflation around the world (driven by higher oil prices since Russia invaded Ukraine) is slowing economic activity in the US, Germany and Britain.

China’s economy is being slowed by stop-start Covid lockdowns. As the economies of these countries slow, so does their demand for raw materials from South Africa, especially gold and platinum group metals.

Mining, manufacturing and retail are important for South Africa’s economy. Industrial production (made up of mining and manufacturing activity) contributes about 20.5% to overall economic activity, whereas the trade sector (including retail) accounts for 13%.

The decline of those sectors in June makes a strong case for the economy to fall in the second quarter, after strong growth in the first quarter.

Signs of hope

Chief economists Annabel Bishop of Investec and Azar Jammine of Econometrix expect the economy to shrink 0.8% in the second quarter. Official GDP figures are scheduled to be published on 6 September.

“Economic conditions have deteriorated in recent months and growth dynamics have skewed in the wrong direction,” Jammine says.

Absa’s chief financial director Jason Quinn is also taken aback by the deterioration in conditions: “We see South Africa’s GDP as relatively soft for the foreseeable future. You’ve got an interest-rate curve that looks far steeper than we would’ve thought. 

“We all knew that once Covid-19 was behind the markets, interest rates would have to get back to normal levels. But I think it’s fair to say it’s getting there quicker than we thought. No one thought we’d have this conflict in Ukraine that would push the oil price way up,” Quinn says.

Even the economies of developed countries are already in a recession or heading there. There isn’t incessant talk about a recession in South Africa, but that could change if power cuts persist, says Jammine.

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Demand for coal

The economy is expected to record decent economic growth for 2022: Investec’s Bishop expects growth of 1.9%; Econometrix’s Jammine, Absa and Standard Bank are more optimistic at 2.3%, above the Reserve Bank’s 2% forecast made in July.

If these forecasts hold, South Africa’s growth might be higher than China’s for the first time in many decades. The International Monetary Fund says China’s growth could be as low as 1.1% if Covid lockdowns persist there.

On the upside, Jammine expects coal, South Africa’s key export, to be a driver of growth in the coming months. The world has imposed economic sanctions against Russia and is shunning its coal. Europe is facing a daunting energy crisis that is increasing its demand for coal.

Coal exports from South Africa to Europe rose from 1.7 million tonnes in the second half of 2022 to 4.5 million tonnes in the first half of this year, according to coal miner Exxaro. Bishop notes that coal has been South Africa’s largest export this year.

Global coal prices have tripled over the past couple of years and remain high (unlike the prices of gold and platinum group metals, which are declining), benefiting JSE-listed coal producers such as Thungela Resources and Exxaro, which in recent days reported bumper half-year profit increases. This will also benefit South Africa’s tax collections on company profits.

Sustainable growth

The big question is what will get economic growth going on a sustained basis.

The game changer for the economy, says Jammine, will be if the government delivers on its promise to roll out infrastructure projects such as roads, bridges and human settlements.

The government, which neglected infrastructure investments for many years and left them to the private sector, announced in February that it would prioritise 55 new infrastructure projects with an investment value of R595-billion.

“If those projects were to materialise, the economy would boom as you have never seen before,” says ­Jammine.

Solving the power crisis should be the main focus, says Cas Coovadia, the CEO of Business Unity South Africa. 

Ramaphosa recently unveiled an energy plan that aims to deregulate the energy sector, allowing the private sector to generate unlimited renewable energy and feed it into the national grid. 

There is broad recognition that the plan won’t immediately end the power crisis but it might ease rolling blackouts.

Coovadia says: “We need to stop talking and get the plan implemented — immediately.” BM/DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R25.