In a boost to sentiment, the South African economy displayed remarkable resilience in the third quarter. Not only did it escape a recession, it grew faster than expected, placing it on track to grow above 2% for the year.
This should lift sentiment, which was rattled by the prospect of President Cyril Ramaphosa resigning, a fear that has subsided with the ANC closing ranks around him.
South Africa’s real GDP, measured from the production side and seasonally adjusted, increased by 1.6% in the third quarter, ahead of consensus expectations for growth of just 0.4% quarter on quarter.
The economy grew 4.1% faster than the same quarter last year and is up 2.3% over the first nine months of this year, compared with the same period last year. The size of the economy is also larger than before Covid in real terms.
Before the release, the consensus was that the economy would grow by 1.8% for the year as a whole. That is likely to shift above 2% since even if the economy contracts in the final quarter, full-year growth is likely to come in at about 2%-2.5%.
The economy’s surprisingly strong showing in the third quarter seems to run counter to the record load-shedding that occurred during that period.
Particularly noteworthy is that the energy-intensive mining sector grew by 2.1% quarter on quarter, while the manufacturing sector grew by 1.5%, with seven of its 10 subdivisions reporting positive growth rates. The motor vehicle, parts and accessories and other transport equipment division made the largest contribution.
In previous quarters with such intense load-shedding, the mining and manufacturing sectors invariably contracted. This has led some economists to speculate that the self-generation of energy by some big energy users may be starting to free them from the shackles of Eskom.
This factor may have played a role. However, a more likely explanation is that third-quarter data benefited from the artificially low statistical base effects caused by last year’s July riots.
Either way, the upshot is that South Africa has escaped a recession despite experiencing floods, strikes, deteriorating freight rail performance, record load-shedding, soaring inflation and significant interest rate increases over the past year.
The upside surprise was largely due to strong expansion in agriculture because of another bumper grain harvest and robust growth in horticulture. The sector grew by almost 20%, contributing 0.5 of a percentage point to the quarterly GDP figure.
The finance, real estate and business services sector also did well, growing by almost 2% and contributing a further 0.5 of a percentage point to third-quarter growth.
The transport, storage and communication industry increased by 3.7%, contributing 0.3 of a percentage point. Even the construction industry managed to expand, growing by 3.1% quarter on quarter — its first positive showing since the first quarter of 2021.
The upside surprise was largely due to strong expansion in agriculture because of another bumper grain harvest and robust growth in horticulture
On the other hand, the South African consumer is beginning to wilt. For the first time this year, household consumption expenditure turned negative, contracting by 0.3% quarter on quarter. It has been on a declining trend, having posted growth of 1.2% in the first quarter and 0.6% in the second quarter.
Households mainly pared back their spending on nondurable goods, food and nonalcoholic beverages, clothing and footwear, and recreation and culture as higher inflation ate into disposable incomes.
The hotel and restaurant sector, however, did well with spending climbing by 5.5% quarter on quarter though this most likely reflects the continuing recovery in inbound tourism, explains Matrix Fund Managers economist Carmen Nel.
She also notes there was a broad-based increase of 12.1% year on year in the gross operating surplus (a rough proxy for economy-wide profits), up from 5.5% in the second quarter. This raises the odds of another positive tax revenue surprise in the February 2023 national budget, says Nel.
On the other hand, gross fixed capital formation was still barely positive at just 0.3% in the third quarter, after growing by 0.4% in the second quarter and 3.4% in the first quarter. It is imperative for fixed investment spending to pick up far more robustly if the economy is to sustain annual growth rates above 2% over the medium term.
The bottom line, according to BNP Paribas senior economist Jeff Schultz, is that the numbers indicate a more resilient economy but also that some cracks are emerging in the outlook for consumers.
“Heightened load-shedding into the fourth quarter and 2023, stickier inflation, less supportive commodity prices and a souring global growth backdrop mean that we should expect momentum in activity to slow down sharply from here,” he warns.
BNP even sees scope for South Africa’s growth to contract slightly in the final quarter of the year.
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