SA avoids technical recession – Moneyweb


FIFI PETERS: Some more on South Africa’s GDP numbers. I think that many of us were pretty excited when we learned that South Africa’s economy defied expectations [with] the third quarter growing despite load shedding costing business an arm and a leg, and also growing to a level that has it now at a size that’s larger than it entered the Covid-19 pandemic with.

But the question is where to from here? Can the tide that lifted South Africa’s economic boat higher this time around continue to do so as we wrap up 2022, and as we enter 2023?

We’ve got Sanisha Packirisamy, an economist at Momentum Investments, for more on this. Sanisha, starting with your initial impressions of the GDP print, from what I’ve heard it beat even the most ambitious forecast by economists this time around. Your impression of South Africa’s economic growth this time…?

SANISHA PACKIRISAMY: Good evening and it’s so lovely to be chatting with you again. I think your initial word of caution on the GDP figures is exactly spot on. We also see that this overshoot, relative to the consensus expectation on growth, was definitely encouraging, especially since most people were quite worried about the severe electricity outages that we’ve experienced. Of course we also saw quite significant constraints at the railway and port sectors of the economy.

However, if we look at the GDP jump, it is still part of quite an uninspiring longer-term recovery, and this resurgence is unlikely to carry through into 2023. A lot of the factors that buoyed the strength in this GDP number are likely to turn less positive going into next year,

and we are anticipating that the load-shedding factor is going to become a bigger constraint on growth.

FIFI PETERS: Like what? Agriculture seems to be the biggest surprise and the standout performer in the third quarter. So you are saying that we could possibly see a moderation in the performance of the agriculture sector – and [give] just a little more colour on the areas of concern that you have on the economy that may not push as strongly in the period ahead?

SANISHA PACKIRISAMY: Sure. There’s one way of looking at GDP when you break it down on a sectoral basis, and that we saw in the agricultural sector and the transport sector doing reasonably well. I think that there was obviously some recovery that came through post the flooding damage that occurred in KwaZulu-Natal earlier on in the year.

So, going forward into the fourth quarter, we do see some slowing in those categories. Another way of stripping out the GDP print that came out was to look at whether the factors of growth came through from the consumer. Was it fixed investment, was it government or net trade? The results showed that there was quite a big rebuild in inventory cycles, as well as quite a high number on the export side.

Now, in terms of the inventory rebuild, I think that’s unlikely to continue at the same clip in the next couple of quarters.

As we go into 2023 we’ve seen the growth forecast being pared back over the last couple of months for South Africa’s outlook for 2023, and businesses [that] catch sight of this are unlikely to build inventory at such a rate.

The second factor [is] the export side of things. If we look at South Africa’s main export trading partners, growth is likely to suffer in many of these jurisdictions, meaning that there’s going to be a slowdown in demand for South African exports, and that’s also going to hurt growth next year.

FIFI PETERS: It sounds like you’re saying that the economy is not yet out of the woods, and perhaps statements that the current leadership is not doing a shabby job in growing the economy – and even helping to lower unemployment by a bit as per the latest numbers that came out from Stats SA – are a bit premature and perhaps even slightly inaccurate.

SANISHA PACKIRISAMY: I think so. If you really want to look at the core of it, if we looked at GDP growth for the last 10 years in real terms in South Africa, the economy has grown on average by 1%, but the population has grown at 1.5%. That means that our economy simply did not grow fast enough to absorb the new entrants that came into the labour market, and that [goes] a really long way in explaining a higher level of poverty and worsening inequality in our own South African climate.

That means that, going forward, in order to really kickstart growth opportunities and job opportunities we do need to rely more heavily on the implementation of growth-enhancing reforms so that we generate these opportunities [for] poorer households.

I think on the business side of things we also need to take a step in the right direction of deregulating the economy, so that local businesses have the space to grow and to absorb a higher share of the country’s labour force.

FIFI PETERS: Is this GDP print inspiring enough to make investments that are looking for a home consider South Africa?  if you look at the report in itself, it did mention that there was an uptake in gross fixed-capital formation, and we know that that line item looks at what business is doing and how much business is investing in the economy. It wasn’t a huge increase, but I wonder if the uptick is the start of a trend that makes South Africa look a little bit better to do business [in], or has the recent political noise cast aspersions on that?

SANISHA PACKIRISAMY: The recent political noise certainly doesn’t help. If we look at the Bureau for Economic Research’s Manufacturing Survey, they usually tell us [about] some of the biggest constraining factors that are holding back fixed-investment growth in the economy. And the number one factor is ‘general political climate’. This has likely increased further on the back of what we’ve seen in the political landscape more recently.

The other factors include things like having insufficient demand, and going forward into 2023, with most forecasters anticipating a slowdown in growth relative to this year, [it] does mean some element of dampened demand.

The third fact is that we have experienced this series of interest-rate hikes, so that also tends to hold back fixed investment.

It’s not all doom and gloom. We do expect fixed investment to become a far more meaningful driver of growth in the second half of next year, particularly in the energy space.  I think we are starting to see some signs of life around embedded generation projects, independent power producers, [and] the risk-mitigation IPPs [independent power producers].

We are not, however, expecting a more broad-based recovery in fixed investment across all sectors, given that lingering policy uncertainty.

But I think what is also quite encouraging is if we look at those fixed-capital formation projects and how they’ve shifted over the last while.

The last quarter showed quite a significant increase in growth coming through relative to the average growth rate that we’ve experienced since the global financial crisis.

FIFI PETERS: It was also pretty encouraging to see that even the construction sector grew. That sector hasn’t grown since nineteen-I-don’t-know-what [in] emphasis for a long time, and I think that that was a little bit encouraging. Are you able to tell at this stage where that work came from?

SANISHA PACKIRISAMY: I’m not sure. If we look at the fixed-investment performance, quite a bit of it came through the research and development sector. We also had quite good growth in machinery, and I think that also then ties back into the strong imports we saw earlier on this year. There are some spaces of construction which still look quite bleak. Non-residential, for example, is down more than 40% relative to the pre-pandemic level. Overall construction – and here I’m talking about things like railways and roads and bridges – is down about 20% relative to pre-pandemic levels.

So we have some areas that are doing a lot better on the construction side, and then some that are still lagging. I think there are numerous reasons why non-residential is not doing well. We all know about the overcapacity that was built – especially in the office sector – and that continues to be a headwind for the construction space.

FIFI PETERS: We had Alexforbes on the show yesterday, talking about downscaling their office space. So I hear your point on that one.

But Sanisha, you mentioned interest rates and I’d like to understand how a Reserve Bank looks at this report because, when we look at the US economy, we have seen strong data coming out of that economy in the recent while. Their job numbers have been strong and there were some services numbers released earlier that were strong.

While it’s great to have a strong economy, there are concerns about how your central bank responds to that – whether the central bank steps on the accelerator in terms of interest rates as it continues its fight with inflation.

So paint the picture as it relates to South Africa’s economy. We have our MPC [Monetary Policy Committee] coming up next month, not too far away, but this strong print – is this an economy that tells the South African Reserve Bank that [it hasn’t] yet done enough, or did you see pockets of weakness in this print that you think the Reserve Bank may look at twice, to suggest a bit of an easing or perhaps even taking its foot off the pedal just for now?

SANISHA PACKIRISAMY: In fact I do think that there are some signs that there is weakness in the economy that has been already borne out by the interest-rate increases we’ve seen. The one indicator is really the performance of household consumption in the numbers – and household consumption actually contracted during the quarter. Up until the second quarter household spending and exports were the largest drivers of GDP growth.

Then that changed in the third quarter when exports continued to do well, but the household sector actually did quite poorly. I think from that we are seeing that consumers are now starting to feel the pressures of higher food prices, higher fuel costs, a higher interest-rate burden caused by a series of interest-rate hikes by the Monetary Policy Committee, and just generally weak consumer sentiment.

Going forward we do believe that there was an element of signalling from the Reserve Bank in terms of the committee’s views, and preferences were split at the last meeting to suggest that they may have actually reached a peak in hawkishness in terms of their approach to monetary policy.

That doesn’t however mean that we think that they’re going to cut interest rates very close on the horizon.

We still think that there will be another interest-rate increase at the January meeting, just to quell these inflationary pressures and to ensure that we don’t see a broader-based increase of inflationary pressures in the economy.

Thereafter I think that the Reserve Bank takes stock of what is happening to the consumer and to businesses in general in the economy. Thereon out we are expecting a pause in interest rates to follow.

FIFI PETERS: Okay. Good to know. Sanisha, thanks so much for your time. If we don’t speak again before the year ends, have a wonderful festive [season] and I look forward to speaking to you again in 2023. Sanisha Packirisamy is an economist at Momentum Investments.

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