South African economy threatens downturn

DURBAN, South Africa – April 16, 2022: Massive debris in Durban harbor after heavy rainfall, mudslides, rain and wind in Durban. The port serves as a stronghold for the economy of the city of Durban.

RAJESH JANTILAL/AFP via Getty Images

South Africa’s economy took off in the first quarter of the year, but historic flooding in a key province and the threat of unprecedented power cuts are slowing its recovery.

The port city of Durban and the wider province of KwaZulu-Natal in eastern South Africa were besieged in April by the worst flash flooding in decades, killing hundreds and stifling cargo operations at Sub-Saharan Africa’s busiest port.

The manufacturing PMI for Absa/BER – which had risen to a record high of 60.0 in March – fell to 50.7 in April, the lowest level 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 center of the worst riots in the country since the end of apartheid.

S&P Global’s composite PMI also fell to a four-month low, and in a note last week Capital Economics emphasized that high-frequency data suggests the recovery in mobility has stalled.

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

However, April’s dismal PMI data poses a downside risk to JPMorgan’s second-quarter GDP growth forecast of 1.5%. In addition to the global backdrop of the war in Ukraine, rising inflation and Chinese supply problems, South Africa is also experiencing domestic shocks from flooding and electricity rationing.

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

Load shedding – intentionally turning off power in parts of an electricity system to prevent it from going out in the event of overload – increased significantly in April, with power cuts expected this year to surpass already significant amounts in 2021.

JOHANNESBURG, South Africa: Soweto residents peck at the entrance to state entity Eskom Offices in Megawatt Park in Midrand, near Johannesburg, on June 9, 2021, due to ongoing power outages. Eskom announced on June 9, 2021 that it will implement power cuts nationwide due to rising consumption as the cold weather kicks in and outages at two power plants.

Photo by PHILL MAGAKOE/AFP via Getty Images

Although flooding has largely abated, power cuts are an ongoing problem for the South African economy.

State-owned Eskom’s electricity availability factor — which measures available electricity as a proportion of the maximum amount of electricity it can produce — has remained at record lows in recent weeks, noted Jason Tuvey, senior emerging markets economist at Capital Economics.

Public Enterprises Minister Pravin Gordhan has warned that Eskom could resort to a phase 8 charge shutdown, which would involve power cuts for up to 12 hours a day, to avoid a total collapse of the country’s electricity grid.

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

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

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

“The onset of winter has led to increased demand and this will lead to capacity constraints during this period, especially during the evening and morning rush hours. Unfortunately, this would generally require the implementation of loadshedding during the evening rush hour,” it said in a statement. declaration.

Eskom reiterated that loadshedding is a “last resort to protect the national power grid” and urged South Africans to continue to use electricity “sparingly”, especially in the mornings and evenings.

Possible Q2 contraction

The government has declared a state of disaster in response to the flooding and has begun to repair the damage.

“Still, we expect April’s decline to reverse more slowly than the rapid rebound we saw after last July’s turmoil given road infrastructure damage and port delays,” JPMorgan’s Nkalanga and Keller said in their latest research paper. . †

“Meanwhile, energy availability has declined significantly this year, raising the risks of extended power outages, while consumer resilience that likely led GDP growth in Q1 should decline this quarter due to a purchasing power shortage. “

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

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