South Africa’s economy is threatened with recession

DURBAN, South Africa – April 16, 2022: Massive debris in the port of Durban following heavy rain, landslides, rain and winds in Durban. The port acts as a bulwark for the economy of the city of Durban.

RAJESH JANTILAL / AFP via Getty Images

The South African economy gained momentum in the first quarter of the year, but historic floods in a key province and the threat of unprecedented power outages are holding back its recovery.

The port city of Durban and the wider KwaZulu-Natal province in South East Africa were defeated by the country’s worst flash floods for decades in April, which killed hundreds of people and restricted freight operations in the busiest port of the country. ‘Sub-Saharan Africa.

The Absa / BER manufacturing PMI, after rising to an all-time high of 60.0 in March, tumbled to 50.7 in April, its lowest reading since violent riots following the arrest of former president Jacob Zuma in July of last year.

KwaZulu-Natal, the second most populous province in South Africa, which has also been the center of the country’s worst uprisings since the end of apartheid.

The S&P Global composite PMI also fell to a four-month low and in a statement last week Capital Economics highlighted that high-frequency data indicates that the recovery in mobility has stalled.

Q1 figures paint a mixed picture, according to JPMorgan economists Sthembiso Nkalanga and Sonja Keller, but point to seasonally adjusted quarterly GDP growth of 3.5%.

However, the poor representation of the PMI in April poses a downside risk to JPMorgan’s 1.5% GDP growth projection for the second quarter. In addition to the global war scenario in Ukraine, rising inflation and Chinese supply struggles, South Africa is also facing internal shocks from floods and electricity rationing.

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

Load shedding – the deliberate shutting off power in parts of an electrical system to prevent them from failing when overloaded – increased significantly in April, with electricity cuts this year expected to exceed the already substantial quantities seen in the year. 2021.

JOHANNESBURG, South Africa: Soweto residents picket lines near the entrance to the Eskom government offices at Megawatt Park in Midrand, near Johannesburg, on June 9, 2021 due to continuing power outages. Eskom, on June 9, 2021, announced that it will implement power outages nationwide due to increased consumption with the arrival of cold weather and failures at two power plants.

Photo by PHILL MAGAKOE / AFP via Getty Images

Although floods have largely abated, cuts in electricity supply are a constant problem for the South African economy.

The state utility Eskom’s electricity availability factor – which measures available electricity as a share of the maximum amount of electricity that could be produced – has remained near historic lows in recent weeks, noted Jason Tuvey, senior emerging markets economist. at Capital Economics.

Public Enterprise Minister Pravin Gordhan warned that Eskom could resort to phase 8 of load shedding, which would result in blackouts of up to 12 hours a day, in order to avoid a total collapse of the country’s electricity grid.

“Some shocks such as floods are clearly beyond the government’s control but, even without these, the recovery will continue to be held back as long as issues such as those affecting the electricity sector remain unresolved,” Tuvey said.

The International Monetary Fund expects real GDP growth, adjusted for inflation, of 1.9% for South Africa in 2022.

On Thursday, Eskom announced the implementation of phase 2 of the load reduction between 17:00 and 22:00 local time.

“The onset of winter saw an increase in demand and this will result in capacity constraints during this period, particularly during the evening and morning peaks. Unfortunately, this would generally require the implementation of load shedding during the evening peaks.” reads a note. .

Eskom reiterated that the shifting of the load is “the last resort to protect the national grid” and urged South Africans to continue using electricity “sparingly”, particularly in the early morning and evening.

Possible contraction of Q2

The government declared a state of disaster in response to the floods and began efforts to repair the damage.

“However, we expect the April slip to reverse slower than the rapid rebound seen after the riots last July given the damage to road infrastructure and delays in ports,” said JPMorgan’s Nkalanga and Keller in their latest research note. .

“Meanwhile, energy availability has declined significantly this year, increasing the risks of prolonged power outages, while the consumer resilience that likely drove Q1 GDP growth is expected to fade this quarter to due to a squeeze in purchasing power “.

Against this backdrop and in the South African economy’s sensitivity to changing external market conditions, including global supply chain problems, a potential slowdown in growth in China and the war in Ukraine, JPMorgan sees “a greater risk of slower growth. of GDP or even a quarter contraction. “