Following a relatively strong Q2 2023, several data points have shown that Q3 2023 has not gotten off to a shaky start for South Africa.

According to the Bureau for Economic Research (BER), the Absa Purchasing Managers’ Index (PMI) dropped from 47.6 in June to 47.3 in July – below the neutral 50 mark, demonstrating a tough start for Q3 manufacturing activity.

Although the overall PMI was little changed, there was a substantial drop in new business activity (down 11 index points) as intensified load shedding and delays in receiving inputs caused by disruption on the N3 corridor – caused by several truck torchings – had an effect.

The supplier deliveries index also increased by 12 index points, which was indicative of supply chain disruptions and not increased demand.

In terms of positive news, the PMI price index did fall, indicating that there will be a continued slowdown in the annual growth rate of the producer price index (PPI).

Looking at the broader business conditions in South Africa, the S&P Global PMI dropped from 47.7 in June to 48.2 in July.

“Inflationary pressures, weak confidence and capacity constraints were all highlighted by firms as driving customer demand lower, resulting in the headline PMI posting in contraction territory for the fifth month running,” David Owen, Senior Economist at S&P Global Market Intelligence, said.

In addition, the BER said that South Africa’s international trade surprised on the downside, recording a R3.5 billion deficit in June, despite expectations of a R5 billion surplus.

“Besides logistical bottlenecks likely hampering exports, reports during the month suggested some delays in customs processing. Assuming that the latter was swiftly resolved, the trade figures may look better again in July,” the BER said.

This is especially given the strong performance of vehicle exports, with export sales growing by 47.3% year-on-year in July, the highest level since September 2022.

“While this annual increase is due to the low base effect of the production and export disruptions caused by the devastating floods in Durban last year, export sales still grew by more than 35% m-o-m in July.”

That said, South Africa’s electricity woes are persisting, with electricity generation falling by 3.7% year-on-year in June, according to Stats SA.

“However, in line with the less intense load-shedding experienced in June, there was a seasonally adjusted rise in the month’s electricity production (up 3.6% m-o-m), following a decline of 0.8% m-o-m in May,” the BER said.

Q3 warning – with some hope

Despite South Africa facing better-than-expected levels of load shedding in winter, the grid experienced several hiccups in July, which could affect the country’s Q3 performance.

In July, South Africa experienced two major cold fronts, which pushed demand up, forcing Eskom to implement stage 5 and 6 load shedding, respectively.

Despite the BER being positive on Q2 2023 real GDP dynamics – with manufacturing and mining production higher in Q2 compared to Q1, the economists warned that higher levels of load shedding could slow down Q3 growth momentum.

“Therefore, the weakness we initially expected for Q2 may simply be postponed to the third quarter,” the BER said.

However, while the jury is still out for Q3 GDP, economists at Absa believe that South Africa’s full year economic performance will be better than initially forecast.

In the group’s latest economic review, the bank now forecast real GDP growth of 0.7% in 2023, up 0.4 percentage points higher than in the last quarterly perspectives.

Forecasts for 2024 are also higher at 1.6% (0.3pp higher).

“Despite the sharp escalation in load shedding, economic activity in H1 23 was healthier than we expected. Electricity supply will continue to be a growth risk, but we believe that ongoing efforts in private generation will make the economy more resilient over time,” Absa said.

That said, overall growth momentum is likely to remain weak as weak business confidence constrains a generalised investment cycle while household consumption growth will also be under pressure, it noted.

Adding to hope for consumers, however, Absa said that headline inflation is likely to ease further and that the South African Reserve Bank’s hiking cycle has ended.

“We expect the SARB to cut rates from March next year,” it said.

But even with a more hopeful spin on the economic data head, the bank conceded that risks remain on the downside, and the high levels of uncertainty persist.

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