EDITORIAL: Bleak GDP numbers are cause for alarm

If the headline numbers were a shock, the details were even more so.

Economists had expected the economy to contract in the load-shedding ravaged fourth quarter, but the latest GDP numbers show the contraction, at 1.3%, was more than three times the consensus forecast.

It had been expected that energy intensive sectors such as mining and manufacturing would be hit hard. And indeed, Absa economist Peter Worthington calculates that load-shedding shaved a full 1.7 percentage points off fourth quarter growth, so without it the economy might have shown some growth.

What was not expected was that the biggest driver of the fourth quarter’s decline was one of the least energy intensive sectors but also the economy’s largest. The finance, real estate and business services sector has traditionally been one of the mainstays of the economy, growing even when other sectors slide. But the sector posted a surprise 2.3% decline which, other than in the hard lockdown, was its worst performance since 1993, notes Deutsche Bank economist Danelee Masia. She argues this can’t have been load-shedding related given the sector’s low level of energy intensity and likely backup power measures.

That raises questions about what else is going on in the economy. It surely can’t be good. And to the extent that it reflects very low levels of confidence, it could get worse, with the latest Bureau for Economic Research survey showing business confidence plummeting to even lower levels in the first quarter of 2023 than the already low levels in the fourth quarter of 2022.

The trade sector also detracted from growth, despite the recovery in tourism and eating out. So too did the typically stable government sector. It’s clear that amid ever worse levels of load-shedding and sliding confidence, growth is becoming more volatile — and more unpredictable. But the overall picture is a bleak one. And where the Reserve Bank’s latest 0.3% forecast for 2023 was considered way too bleak when it came out not long ago, now it’s starting to look like it could even prove too optimistic.

On the upside, investment spending has picked up and that could provide some momentum for the economy. Companies are updating plant and equipment and technology after a long investment drought. They are investing in new renewable energy and other backup power sources at a rapid rate, as are households, and that could help to mitigate load-shedding too in the coming year.

On the downside, however, load-shedding is fuelling inflation and that could put pressure on the Bank to raise rates. Adding to that is an unfriendly global environment which is putting pressure on the rand, potentially also fuelling local inflation and rate hikes. US Federal Reserve chair Jerome Powell’s comments this week that interest rates might have to climb higher than expected have not helped.

The bottom line is that the 2% growth rate the economy clocked up in 2022, is as good as it’s going to get. At best, the economy will show fractional growth this year; at worst it could contract. The implications for employment and living standards are dire. The latest GDP figures simply come as another warning to the government that the endless shuffling of the feet on reforms and the ineffectual cabinet reshuffle are doing ever deeper damage to SA’s economy and its people.