Third-quarter GDP prospects bleak amid global downturn

Despite a better-than-expected GDP outcome in the second quarter, economic indicators released so far point to a tough start for the third quarter, with persistent load-shedding and rand volatility continuing to pose significant challenges to growth, the latest EY economic outlook report reads.

EY chief economist Angelika Goliger said while real GDP surprised to the upside in the first half of the year, expanding 0.6% quarter on quarter in the second quarter from growth of 0.4% in the first, the weeklong taxi strike in the Western Cape in August, the torching of trucks on the N3 in July and the slowdown in global growth will weigh on the outlook.

While the US economy shows signs of a robust outlook for the third quarter, the threat from the resumption of student loan payments, a government shutdown and a strike by union workers at vehicle makers could weigh on fourth-quarter GDP growth, Goliger said.

She added that the disappointing growth in China also poses a risk to the global economic outlook.

“Growth in the eurozone remained subdued in the second quarter, partially due to inflation and tight financing conditions ... and emerging markets are expected to experience moderate growth momentum.”

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China, the eurozone and the US are SA’s strongest trade partners, and slowing growth in these countries affects SA exports. Commodity exporters are especially vulnerable to China’s slowdown. China’s economy absorbs about a fifth of the world’s oil, half of its copper, nickel and zinc, and three-fifths of its iron ore.

Goliger said the low growth outlook is worsened by sticky core inflation, which is still at elevated levels, making central banks retain their tightening bias towards higher-for-longer interest rates.

SA will also have to contend with dampened growth prospects in Sub-Saharan Africa.

According to the IMF’s latest world economic outlook, growth in Sub-Saharan Africa is expected to decline from 3.9% in 2022 to 3.5% in 2023 before rising to 4.1% in 2024.

The Washington-based institution said high inflation, tight financial conditions and weak exchange rates will continue to have a negative effect on the continent’s growth outlook, Goliger said.

While SA’s trade balance improved in August, domestic and external challenges will continue to weigh on the outlook. Local factors affecting growth include load-shedding, weak confidence and the volatile rand.

Persistent load-shedding continues to pose significant challenges, Goliger said. The situation is worsened by reduced generating capacity and increases in power plant breakdowns for unscheduled and scheduled maintenance.

“The outlook for [the] power situation in SA looks bleak. Eskom’s 52-week outlook suggests at least stage 2 loadshedding every week. Eskom also cautioned [about] stage 7 or even stage 8 load-shedding if electricity consumption was not significantly reduced.”

She said consumer and business confidence show signs of recovery in the third quarter even as consumer spending remains weak. This was supported by headline inflation trending lower in July and August, at 4.7% and 4.8%, respectively, well within the central bank’s range of 3%-6%.

While the rand strengthened slightly against the dollar after the hawkish monetary policy statement by the Reserve Bank, the overall trend remains weak amid rising prospects of the Federal Reserve keeping rates higher for longer, Goliger said.

“The rand is likely to remain under pressure,” she said.

SA’s 20-year government bond yield hit 12.95% compared with the 13.3% it reached in March 2020 when governments worldwide were trawling their coffers to provide a soft landing for citizens and businesses hit by Covid-19 lockdown restrictions.