SA may avert recession if power cuts are kept at bay

South Africa’s economy, which contracted the most in a decade in the first quarter as the nation suffered the deepest power outages since 2008, may avert a recession if the electricity utility is able to keep the lights on through winter.

The wave of load shedding from November through March was among the worst the country has yet experienced, causing manufacturing, mining and agriculture to lead an annualised 3.2% decline in gross domestic product, from a 1.4% expansion in the prior three months. While weak factory-sentiment data in the current quarter raises the risk that the economy may slip into the second recession in successive years, consistent power supply could see this avoided.

“The only thing about such a large contraction is that it creates a large base effect, which helps an economy to bounce — so you would have to do worse in the second quarter than the first quarter in order to get a technical recession,” said Gina Schoeman, an economist at Citibank South Africa. “We don’t have enough visibility in the high-frequency data, but there’s no doubt, our GDP forecast for the year has been 0.9% and we’ve been below consensus — I wouldn’t be surprised if the consensus drops further now.”

Africa’s most-industrialised economy went through a recession last year and hasn’t expanded at more than 2% annually since 2013. The government and central bank see the economy expanding by 1.5% and 1% respectively in this year. Power cuts could bring economic growth for the year close to zero if they resume at the same severity seen in March, when the utility that provides almost all the country’s electricity removed about 10% of supply from the grid daily, the central bank said in April.

The trade war between China and the US also adds to problems for the economy. South Africa is the most exposed after those two countries, research by Bloomberg economists David Powell and Maeva Cousin shows.

Rate cuts?

With inflation largely under control, the bigger-than-expected contraction will also add to calls for the central bank to ease monetary policy. The South African Reserve Bank held its key interest rate at 6.75% in May, but a cut could be on the cards, with some policymakers voting for reductions for the first time in 14 months as they slashed the nation’s economic-growth forecast.

The rand weakened as much as 1.4% against the dollar after the data release, while the banking index fell 4.1%, the most since December.

The 3.2% contraction compared with a median estimate for a decline of 1.6%, and was led by a 13% drop in agriculture. Mining fell 11%, while manufacturing decreased 8.8%.

© 2019 Bloomberg L.P