Economic growth contracted slightly in the first quarter of the year, coming in just below consensus expectations. This adds to the country’s tense mood after the national election shocks.
The consensus expectation was that the economy would pick up this year as load-shedding and inflation receded, bolstered by a few interest rate cuts, but after the bleak Q1 GDP results some economists may trim their 2024 forecasts.
The uncertainty generated by coalition talks has helped to put the hoped-for economic recovery, however mild, in jeopardy. However, if these talks lead to a centrist coalition, the 2024 growth outlook could improve beyond the Reuters consensus expectation of 1.0%.
According to Stats SA real Q1 GDP growth was -0.1% quarter on quarter (0.5% year on year) compared with an upwardly revised 0.3% in Q4 2023. The Reuters consensus was for Q1 growth of 0.1%; the more bullish Reserve Bank had forecast 0.2%.
Though agriculture staged a powerful turnaround to grow 13.5% q/q, intense load-shedding at the start of the year hammered the secondary sector (-1.5% q/q) while the high interest rate environment prevented the consumer-facing and service sectors from coming to the rescue.
In rand terms, Q1 real GDP of R1.16-trillion puts the country back at the level reached in Q3 2022, meaning that the economy has stagnated for the past two years in inflation-adjusted terms.
Since the 2021 Covid rebound — when the economy grew by 4.7% after plunging by 6% in 2020 — it has stumbled, slowing to 1.9% in 2022 and just 0.6% in 2023.
Extremely worrying is the downward trend in gross fixed capital formation, which contracted by -1.8% in Q1, compared with -0.2% in Q4 2023 and -4.7% in the quarter before that. (There is a close correlation between business confidence, fixed investment and jobs growth.)
Before the election, growth prospects had been perking up because there was almost no load-shedding in April and May. Indeed, the Bank’s most recent forecast was for quarterly growth to improve to 0.7% in Q2. However, the uncertainty generated by coalition politics may have put paid to that.
Most economists believe a coalition between the ANC and radical parties to its left — the EFF or even the MK Party — would severely harm growth (partly through a much weaker rand and higher inflation) while a centrist coalition with the DA (which expedites structural reform) would be good for business confidence and investment and potentially deliver better growth outcomes than the status quo.
These are the economic imperatives that key political leaders now engaged in crucial coalition talks must visibly incorporate into their agenda of discussions
— Raymond Parsons
“South Africa’s latest growth statistics send a strong message in the aftermath of the recent elections,” says Prof Raymond Parsons of North-West University Business School. “These are the economic imperatives that key political leaders now engaged in crucial coalition talks must visibly incorporate into their agenda of discussions.”
Citi economist Gina Schoeman says that depending on the outcome of coalition talks, the rand will largely determine the extent to which inflation subsides and so allows household consumption to revive and drive GDP growth higher in the second half.
Viewed from the expenditure side, real Q1 growth was -0.2% q/q (0.2% y/y) compared with an upwardly revised 0.3% q/q in Q4 2023.
All five components of GDP contracted, including household final consumption expenditure, which was down -0.3% after posting 0.1% growth in Q4 2023. Spending was down on clothing and footwear (-7.0%), followed by transport (-1.3%) and alcohol & tobacco (-0.3%).
From the production side, the weakness was broad-based with six out of 10 sectors contracting. The biggest drag was the manufacturing industry, which contracted by 1.4%, shaving 0.2 percentage points off overall growth.
The mining and quarrying industry was down -2.3% while the construction industry slowed by -3.1%. The latter has contracted in nine out of the last 12 quarters.
In contrast, the rebound in agriculture (up 13.5% compared with -2.4% in the previous quarter) added 0.3pp to the Q1 growth rate.
Agriculture Business Chamber of South Africa chief economist Wandile Sihlobo ascribes agriculture’s improvement to robust production across various horticulture products as well as the livestock and poultry industries’ partial recovery after several disease outbreaks last year.
“Overall, the Q1 recovery of the farming economy is a welcome development and aligned with our general observations in various travels across the country,” he says. “Still, we worry that the poor harvest of summer grains and oilseed [due to the midsummer drought] may suppress the figures for the next two quarters.”
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