Business Maverick

Business Maverick

Rand extends losses as sharper-than-expected Q4 GDP contraction signals start of deep recession

Rand extends losses as sharper-than-expected Q4 GDP contraction signals start of deep recession
epa06584664 Construction cranes are seen over a multi store complex being build in the country's biggest city, Johannesburg, South Africa, 06 March 2018. STATS SA released the newest DGP results with an un-expected 1.3 per cent growth through 2017 driven largely by high than expected mining results and backed by a strong last quarter in the retail sector. EPA-EFE/KIM LUDBROOK

The rand extended a fall of recent days after the data was released and the slide continued overnight. Early Wednesday, the currency was fetching 18.64/dlr from around 18.25/dlr just before the GDP numbers were released on Tuesday. That is close to three-year lows and raises the prospect of the currency tumbling to its record low of just over 19/dlr that was hit in April 2020 during the hardest of the hard pandemic lockdowns The surge in rolling blackouts was clearly to blame and the numbers signal that the economy is currently in the throes of a deep recession. 

The gross domestic product (GDP) read for Q4 2022 was simply a shocker, based on the expectations of economists who seem to have underestimated the impact that the surging levels of power cuts have been having on economic activity. 

The case is now open and shut. The economy simply cannot grow if rolling blackouts are maintained at current levels, and in fact is contracting before our eyes. And given the extent of the power crisis so far this quarter, it is safe to say that the South African economy is currently in the throes of a recession which is defined as two straight quarters of contracting GDP. 

To wit, Statistics South Africa (Stats SA) said on Tuesday that the economy contracted 1.3% in Q4, against market expectations of a contraction of 0.4%, according to a median Bloomberg forecast by economists. Indeed, Bloomberg said that the contraction’s size exceeded all of the estimates it gathered from economists. This also pulled GDP back below pre-pandemic levels. Every time the economy crosses that milestone – back to pre-pandemic levels, yahoo! – it gets pushed back into 2019 again.  

This followed Q3 growth of 1.8% – revised up from the initial 1.6% estimate – for a 2.0% rise in South African GDP for all of 2022, also much lower than expectations of about 2.5%. 

The rand extended a fall of recent days – which the Cabinet reshuffle failed to stem – softening over 0.5% to the dollar, to R18.36/dlr at midday Tuesday. That is one proxy of investor confidence and if an economy is tanking, there is not much to support the currency or attract the foreign investment needed to prop it up.

“Growth was dragged lower mainly by finance, trade, mining, agriculture, manufacturing and general government services,” Stats SA said.

So, all the key economic sectors contracted, and for the record, there was no “growth” to drag lower.  

Seven of the 10 broad industries that comprise the GDP number contracted in Q4 last year, and the three that grew did not shoot the lights out. “Personal services” rose 0.2%, construction 0.5% and transport, storage and communication 0.7%. It’s hard to see how those sectors can maintain growth if everything else is in decline. 

Agriculture, forestry and fisheries declined 3.3%, mining by 3.2%. Finance, real estate and business services contracted 2.3%, but given its inflated (some would say distorted) importance to the economy, it had the biggest impact among industries, shaving 0.6% of a percentage point off the GDP figure. 

Of course, the single biggest factor behind the slide was the ramped-up levels of rolling power cuts. Estimates have varied on how much this erodes South African economic growth. The South African Reserve Bank (Sarb) has estimated that it detracts as much as two percentage points from growth. Consultancy PwC has put it as high as five percentage points, and that higher estimate looks a lot closer to the mark. 

If that’s the case, the Sarb’s estimate of growth for 0.3% for all of 2023 is starting to look optimistic. South Africa’s “low-growth” trajectory is moving into “no growth” territory and this dismal trend will simply not be arrested until the power supply becomes reliable. 

The power crisis drains consumer and investor confidence, pushing up the costs of doing business while pushing many smaller ones over the edge, and is a spark for social unrest which has been rising in tandem with the rising levels of electricity cuts.

Read in Daily Maverick:Service delivery protests surged in January as power cuts ramped up, research company finds

And, of course, power shortages are not the only constraint on economic growth in South Africa, but exacerbate all of the other challenges. The rand’s current woes will feed into import inflation – when lots of households are importing solar panels! – forcing the Sarb to maintain its rate-hiking cycle when its Monetary Policy Committee meets later this month. 

“Looking ahead, poor energy availability is likely to remain a key drag on output over the coming quarters, albeit far from the only one. The government has reaffirmed its commitment to fiscal consolidation, which is set to dampen domestic demand. High inflation and interest rates are likely to weigh on consumption and investment. And softer global growth will keep extended demand subdued. We will be revisiting our GDP growth forecast for 2023 (currently 1.0%),” Capital Economics said in a note on the data. 

All economists who cover South Africa are currently revising their economic growth forecasts lower against the backdrop of an economy that is surely in recession. And job creation, poverty reduction and narrowing inequalities are simply not going to take place in this environment. DM/BM

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  • Jane Crankshaw says:

    As predicted, the latest budget was to lull us into a false sense of security – a flinty plaster on a much bigger wound than we thought!

  • Antonio Tonin says:

    Cyril! Economics 101! You don’t shrink economic woes by shrinking the economy! Were you out caucusing instead of paying attention?

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