While the sharp downturn in the latest gross domestic product (GDP) data is largely the result of the civil unrest in July, the third-quarter GDP data points to additional weaknesses in the economy, above all the sharp decline in automotive exports and plummeting prices of iron-ore and platinum, the third-quarter Real Economy Bulletin (REB) by thinktank Trade and Industrial Policy Strategies (TIPS) shows.

TIPS says there was a particularly sharp decline in automotive exports in the third quarter, adding that the automotive “industry faced a perfect storm".

"In addition to the July violence, it was hit by global supply-chain disruptions, notably the international shortage in semiconductors, as well as the cyber-attack on Transnet, which affected car and input shipments. Several companies also introduced new models, which take time to ramp up to full production.”

Commodity prices have also been exceptionally volatile. In the third quarter, both platinum and iron, which account for over 20% of South Africa’s total exports, saw a sudden sharp fall in prices. The result was a sharp fall in their revenues, although they remained high by historical standards.

DIFFICULT CHOICES
The austerity budget for 2022/23 announced in the recent Medium Term Budget Policy Statement seems likely to further drag down economic growth. In constant rand terms, deflated by consumer price inflation, the budget aims for a 7% cut in spending on programmes next year, as the National Treasury capped total spending and taxes, while debt-service payments rose by 8%, the REB report states.

“However, as in 2021/22, the cuts rely on the elimination of the Covid-19 Special Grant and a wage freeze for public servants. These measures are attractive for budget makers because they avoid fights over which programmes to eliminate or downsize. Experience in 2021 already showed, however, that, because they place the burden of cuts squarely on critical parts of the electorate, these measures are unlikely to be carried out as currently designed.”

The REB argues that the return to austerity, which has emerged across Southern Africa, reflects the comparatively weak position of middle-income economies on global financial markets compared with the nations of the Global North. Middle-income economies faced much stronger push back against rising spending, and soaring financing costs, as they grappled with the pandemic outcomes.

“These realities leave South Africa with classic tough choices. The country can cut back on relief and investment programmes, which will fuel unrest and may block the economic recovery. Alternatively, the State could maintain spending in the face of escalating interest payments and pressure from multilateral institutions, ratings agencies and global pundits.

“Both paths involve substantial risks without promising easy solutions. As of late 2021, the government seemed inclined to go with pro-cyclical cuts in spending, despite the human and economic costs,” TIPS notes.

In terms of new investment projects, the REB highlights that the combined value of planned and ongoing projects reported during the third quarter amounted to R45.4-billion, compared with R20-billion in the previous quarter.

“While mining investments accounted for the bulk of investment this quarter, mostly owing to a single large project by De Beers, there was also progress on Aspen’s investment in manufacturing Covid-19 vaccines in East London. The World Bank Group’s International Finance Corporation mobilised a joint funding package for Aspen Pharmacare to support the development of vaccines for African countries to the tune of close on R11-billion,” the REB states.

Further, despite the gloomy GDP data, the REB argues that the reported 5% fall in total employment in the third quarter was overstated, given that non-agricultural value added only dropped by 1.1%.

“It is highly unlikely that employment fell four times as fast. Historically employment falls usually track economic downturns, but only with a lag. Further, there have not been reports of mass retrenchments over the past quarter, which seems unlikely if there were such large-scale formal job losses.”

Therefore, the REB argued that methodological challenges owing to the pandemic and the nature of the unrest in July have made it more difficult to assess employment.

Since the lockdown in April 2020, Statistics South Africa (StatsSA) has been doing telephonic interviews, which effectively shut out households without phones, most of which are comparatively poor and rural. To compensate for the absence of these households in the survey, StatsSA has adjusted the data based on pre-pandemic findings.

The REB averred that the longer the time since the last face-to-face survey, the less reliable the data becomes. In the past quarter, the response rate was unusually low, especially in KwaZulu-Natal and Gauteng, which are the two provinces most affected by the unrest, which account for more than half of all formal workers in South Africa.

Additionally, mining accounted for a disproportionate share of the reported job losses. StatsSA says, however, that the Quarterly Labour Force Survey data on mining are unreliable because of the way mining is distributed spatially, with concentrations in fairly small rural towns.

“Given these limitations, the steepest job losses outside of mining were reported in retail and community services. Construction, agriculture and manufacturing reportedly all shed positions. It should be noted that manufacturing reportedly saw a smaller proportional fall in employment than the rest of the economy in the past quarter.

“However, the data suggest that, despite growth in production, manufacturing employment is now almost a fifth below pre-pandemic levels, and a third lower than in 2008,” the REB states.