September 25, 2022

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5 reasons why South Africa’s economy is struggling right now

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South Africa faces a tough economic quarter, says the Bureau for Economic Research (BER), with low GDP momentum exacerbated by less than ideal domestic and global factors.

Recent data from banking group FNB shows that the average middle-class consumer earning between R180,00 – R500,000 per annum survives on 20% of their monthly salary for more than 20 days in a month, indicating a financially stressed consumer.

This trend is likely to worsen as South Africans face a rising cost of living and a struggling economy.

The BER noted that higher food and petrol costs are key drivers of inflation, and the country faces higher rates this week with many economists and analysts expecting a 50 basis point hike from the South African Reserve Bank on Thursday.

Meanwhile, the country also has to deal with entrenched legacy issues like the ongoing power crisis, and more recent natural disasters like the floods in KwaZulu Natal.

Economists at the BER listed five of these pressure points, and how they are impacting the economy right now.

1. Load shedding

Sustained load-shedding, albeit exclusively implemented in the peak evening hours of last week, is bad news for after-hours retail trade and the hospitality sector, the BER said.

On Monday (16 May), power utility Eskom said it would increase load shedding to stage 4 following a loss in generating units. continue with stage 3 load shedding on Tuesday, and sit at stage 2 load shedding for the rest of the week.

Eskom chief operating officer, Jan Oberholzer, said that emergency power reserves would come under pressure because of increased dependence.

The power utility is burning through two million litres of diesel per day – 40 million litres since the start of March – and the economy is losing around R1 billion a day each time stage 2 load shedding hits.

2. Strikes

Numsa-affiliated workers recently started striking at local steel producer ArcelorMittal.

“This comes while the prolonged industrial action at Sibanye’s gold mining operations continues,” said the BER.

According to Statistics SA, mining production in South Africa has declined by 9.3% year-on-year in March.

“Gold output was the largest contributor to the decrease, plunging by 25.6% and shaving 3.7 percentage points off total mining production. This was at least in part due to industrial action halting production at Sibanye-Stillwater’s SA gold mining operations,” the BER said.

Economists said that the company earlier reported that gold output plummeted by 45% year-on-year in 2022Q1. The strike has entered its third month and is set to weigh on May’s data.

3. Covid-19

A sustained rise in new Covid-19 cases in South Africa, with the 7-day rolling average increasing to above 7,500, could see consumers turn cautious despite hospitalisations remaining low and no tightening of mobility restrictions being expected, said the BER.

The BER added that, as was the case in earlier waves, the contact-sensitive (hospitality and services) sectors will be most impacted.

While the national government has not yet declared a fifth wave of infections, other experts have noted that the country is at least three weeks into the wave – and more optimistically, may already be over the peak.

4. KZN floods

Local beer brewer SAB said it will still be some time before its Prospection brewery will be back to full capacity after operations were severely impacted by the mid-April floods in KwaZulu Natal (KZN).

“Toyota also confirmed it will take some time before its damaged main production lines at the South Durban plant can reopen,” noted the BER.

“While these two examples should have limited impact on overall South African economic activity in the second quarter, it emphasises the widespread and lasting disruptions caused by the floods,” said the BER.

Manufacturing production declined across the country by 0.8% year-on-year in March. The most significant negative contributors to the drop in output were transport equipment and food products.

On the back of a 0.6% month-on-month increase in March, manufacturing production increased in April by 4.7%, indicating that, unlike mining, the factory sector is a positive contributor to Q1 GDP, the BER said.

With the flooding in KZN and severe-load shedding in April, the economists said the factory sector had a tough start to the second financial quarter.

5. Fuel prices

Economists said that there has been a large under-recovery in the basic South African fuel price this month due to a sustained weaker local currency and higher international refined oil product prices.

“Along with the expected reversal in June of the temporary R1.50/litre reduction in the fuel levy, commuters are set to be hit by a substantial fuel price hike next month,” said the BER.

Mid-month data from the Central Energy Fund (as at 17 May 2022) shows a massive under-recovery in the petrol price, indicating that prices could rise by as much as R2.10 per litre – even before the R1.50 fuel levy is added back into the mix.

Should the government intervention come to an end as planned, motorists could see themselves paying R3.60 per litre more at the pumps in June.

Global trends

The BER said that as the US dollar continued to be one of the main beneficiaries of the current risk-off environment, it was not surprising to see the rand exchange rate remain on the backfoot.

“Along with the global growth concerns, the firmer dollar pushed precious and base metal prices lower. From a South African perspective, this was bad news, with the gold and platinum price down on the week,” said the BER.

The group added that the pullback in major South African export commodity prices had a detrimental effect on the JSE ALSI.

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5 reasons why South Africa’s economy is struggling right now