South Africa’s economy is in recession

Durban, South Africa – April 16, 2022: Massive debris at the port of Durban after heavy rains, mudslides, rain and wind in Durban. The harbor serves as a barrier to the economy of the city of Durban.

By Rajesh Jantilal / AFP Getty Images

South Africa’s economy gained momentum in the first quarter of the year, but the threat of historic floods and unprecedented power outages in a key province is putting a brake on its recovery.

The port city of Durban and the greater eastern province of KwaZulu-Natal were besieged in April by the country’s worst flash floods in decades, killing hundreds and shutting down cargo operations in sub-Saharan Africa’s busiest port.

The ABSA / BER manufacturing PMI – rising to a record high of 60.0 in March – fell to 50.7 in April, its lowest reading since the violent riots following the arrest of former President Jacob Zuma in July last year.

KwaZulu-Natal, South Africa’s second most populous province, was also the country’s worst riot center since the end of apartheid.

The S&P Global Composite PMIO fell to a four-month low, and in a note last week, Capital Economics highlighted that high-frequency data indicates that dynamic recovery has stalled.

The first-quarter figures paint a mixed picture, according to JPMorgan economists Stembiso Enkalanga and Sonja Keller, but seasonally adjusted quarterly GDP growth of 3.5%.

However, April’s disappointing PMI posed a negative risk to JPMorgan’s forecast of 1.5% GDP growth for the second quarter. In addition to the global context of the Ukraine war, rising inflation and the struggle for Chinese supplies, South Africa is facing internal shocks of flooding and rationing of electricity.

Much of the decline in the manufacturing PMI was centered on port and manufacturing activity in KwaZulu-Natal, where manufacturing activity fell to 39.6 in April from 60.5 in March.

Loadshedding – Deliberate power outages in some parts of a power system to prevent its failure due to overloading – increased significantly in April, with power cuts expected to exceed the significant levels seen in 2021 this year.

JOHANNESBURG, South Africa: Residents of Sweeto are picketing at the entrance to the state-run ESCOM office in Midrand’s Megawat Park near Johannesburg on June 9, 2021, due to a power outage. Escom announced on June 9, 2021 that it would implement nationwide power cuts due to the onset of cold weather due to rising costs and breakdowns at two power plants.

Photo by Phil Magako / AFP via Getty Images

Although the floods have largely subsided, power outages continue to be a major problem for the South African economy.

The state-owned utility Eskom’s electricity availability factor – which measures the amount of electricity available as a fraction of the maximum amount of electricity that can be generated – has stuck near record lows in recent weeks, noted Jason Tuve, a senior emerging market economist at Capital Economics.

Public Enterprise Minister Praveen Gordhan has warned that the country could resort to such Stage 8 loadshedding to avoid a complete collapse of the power grid, which could lead to blackouts of up to 12 hours a day.

“Some of the shocks, such as the floods, are clearly beyond the control of the government but, even without them, recovery will be stalled until the problems that affect the power sector remain unresolved,” Tuwe said.

The International Monetary Fund is projecting real GDP growth, consistent with 1.9% inflation for South Africa in 2022.

It announced the implementation of Stage 2 load shedding between 5 pm and 10 pm local time on Thursday.

“Demand has increased in early winter and this will lead to power constraints throughout this period, especially in the evening and morning peaks. Unfortunately, this usually requires load shedding implementation in the evening peaks,” it said in a statement.

It reiterated that load shedding was a “last resort to protect the national grid” and called on South Africans to continue using electricity “sparingly”, especially in the morning and evening.

Possible Q2 contraction

The government has declared a disaster in response to the floods and has begun efforts to repair the damage.

“Nevertheless, we expect the April slide to reverse more slowly than the rapid rebound seen after the instability last July, due to damage to road infrastructure as well as delays in ports,” Nkalanga and Keller of JPMorgan said in their latest research note. .

“Meanwhile, energy availability has declined significantly this year, increasing the risk of prolonged power cuts, while consumer resilience, which may have led to GDP growth in 1Q, should fade this quarter due to purchasing power pressures.”

Against this backdrop and the global supply chain problem, a potential growth slowdown in China and the sensitivity of the South African economy to changes in external market conditions, including the war in Ukraine, JPMorgan “sees the risk of slowing GDP growth or even increased risk of contraction.”

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