By Raymond Obermeyer, Managing Director at SEW-EURODRIVE South Africa

All indications are that South Africa’s economic prospects are looking a little brighter than they were a year ago. The economy grew on an annualised basis by 4.6% in the first quarter of 2021, according to the latest GDP figures. Albeit that the recovery is off a low base, expectations are that the economy will grow around 5% this year. South Africa’s current account is in surplus – the second largest surplus in history - and business confidence has improved significantly.

It’s important, however, to see these green shoots in perspective. South Africa’s economic recovery is being driven in part by a commodity cycle boom. Output in the mining sector rose 18.1% in the first quarter. Other sectors that made a positive contribution in the first quarter include finance, real estate and business services.

Agriculture, however, contracted by 3.2% on a seasonally adjusted, annualised quarter-on-quarter rate basis. Statistics South Africa attributes this drop to lower production of field crops and animal products. Agricultural economist Wandile Sihlobo says this is only a temporary setback and that the sector is set for one of the best years on record. Speaking at the Sunday Times The Director’s Event recently, he said the agricultural sector is in a stronger position than it was five years ago thanks to favourable weather conditions and investments which have played to its advantage.

From a business confidence perspective the indices are all very encouraging. The RMB/BER second quarter Business Confidence Index reveals a remarkable 15 point increase in the second quarter, up from 35 in the first quarter and after a low of 5 during the hard lockdown of 2020.

After a record low of 70.1 in May 2020 the South African Chamber of Commerce and Industry (Sacci)’s Business Confidence Index for May 2021 shows a similar upward surge with business confidence levels of 97.0 for May 2021, up from 94.7 in April 2021. Sacci has noted, however, that retail sales and the credit extension environment remain constrained. Persistent load shedding continues to have a negative impact on business confidence. 

Business confidence will likely be further improved after President Ramaphosa’s announcement that the licensing threshold for embedded generation projects will be increased from 1MW to 100 MW within the next 60 days once new regulations have been gazetted.

Given that the announcement came after Eskom had announced stage four load shedding, after more than a third of its generating units collapsed, the news was particularly encouraging. Business Leadership SA recently revealed that increasing the licensing threshold for embedded generation to 50MW potentially creates more than 16 000 direct jobs and will result in R75 billion to R85 billion of investment. This figure will no doubt be significantly higher with 100MW.

Despite these encouraging metrics, of concern is the fact that gross fixed capital formation – an indicator of the measure of investment being made - declined by 2.6% in the first quarter of 2021 with private sector investment contracting by close to 18%.

The question that then needs to be asked is just how sustainable South Africa’s economic recovery is likely to be? The reality is that the mining sector on its own will not be able to ensure economic growth. Its performance currently is being driven by higher commodity prices rather than higher levels of output. That means that once the commodity boom has run its course the economy will once again be vulnerable. Regulatory uncertainty and bureaucratic red tape continue to vex the sector.

Although the agricultural sector expects further growth this year, it certainly won’t be enough growth to act as an economic panacea.

The slow pace of the vaccine rollout, the growing number of Covid-19 infections and persistent load shedding will be doing little to encourage certainty, investment and sustainable economic growth. The economy pays a high price for load shedding. Estimations by Business Leadership SA are that load shedding cost the economy between R80 billion and R160 billion in 2020. In April manufacturing output contracted with factory production down 12% and mining production slowed down – both as a result of load shedding.

Critically it is fixed investment which creates employment – and unfortunately, we have yet to see that metric improve. For our part, SEW-EURODRIVE does see potential in the South African economy. Construction is currently underway on our new R200 million African headquarters based in Aeroton, Johannesburg. The new factory - which will be fitted with state of the art, Industry 4.0 technologies including automated assembly machines and guided vehicles – will be key component of our drive to more efficiently service customers both in South Africa and in the rest of Africa.

The South African economy urgently needs more investments likes the one being made by SEW-EURODRIVE. To encourage these kind of investments, government urgently needs to create a more business enabling and business friendly environment. Until we get that right the current economic recovery is not likely to be sustainable.

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SEW-EURODRIVE is a specialist in drive and control technologies. It supplies the mining industry with a high quality complete drive solution for girth gears including drive pinions, motors, coupling and support infrastructure. The company’s segmented girth gears offer a flexible solution for diverse combinations. In addition, the company supplies bellhousing solutions to the coal mining industry. SEW-EURODRIVE offers a comprehensive range of services to industry for the entire value chain including engineering and selection to start-up and maintenance.