The week in perspective: Stage 6 dilutes Q3 GDP cheer

Cape Town - It was a mixed week on the local economic front with the release of decent GDP and consumer confidence figures overshadowed by rising concern about the domestic growth outlook for 2023. The biggest positive surprise was the better-than-expected real GDP print for Q3. The implication is that even if GDP contracts somewhat in Q4, full-year growth is likely to be between 2 and 2.5% from an earlier expectation of just below 2%. The domestic section has more on the GDP release. A further positive was that the current account deficit for Q3 was somewhat smaller than anticipated.

Another encouraging local release was the improvement in the Q4 FNB/BER Consumer Confidence Index (CCI). On the negative side, poor manufacturing output data for October showed that the factory sector experienced a tough start to Q4.

Furthermore, the dreaded return of stage 6 load-shedding, as well as the expectation that significant power cuts will continue for at least the next six months, puts further pressure on the economy in Q4 and into 2023. Load-shedding was ramped up to stage 6 on Thursday following a high number of breakdowns and the need to preserve emergency generation units. As its budget to procure additional diesel to run the OCGTs is depleted, Eskom keeps the remaining fuel stocks for “extreme emergency situations”.

To alleviate some near-term pressure on the grid, Eskom even delayed the planned refuelling and maintenance outage of Unit 1 of Koeberg by a few days. The unit can produce up to 900MW (almost one stage of load-shedding), but was generating less in preparation for its shutdown.

At a point last week, Eskom was technically ‘shedding’ at stage 7, spread between rolling blackouts and load curtailment on heavy industrial users. Besides the diesel woes, the return of stage 6 has again put the spotlight on the future of Eskom CEO André de Ruyter. Stage 5 load-shedding is set to continue into this week. Eskom once again emphasised that the load-shedding situation will be very challenging over the next six to 12 months and continues to plead with the government for funds to buy diesel.

While we have some sympathy for National Treasury’s argument that it does not have these funds as it was not applied for during the budgetary process, it is not difficult to argue that the situation has changed materially since then. Furthermore, not supplying the funding comes at an enormous (much more than the roughly R19bn Eskom is asking for) cost to the economy.

To be sure, load-shedding would not be solved with more money for diesel, but the higher, more damaging stages could possibly be avoided. Indeed, while Q3 activity data has remained fairly resilient, we will likely only see the real impact of intense load-shedding in the coming months as the ‘reopening’ boost to the economy and other normalisation (from Q2 shocks) effects fade. With this in mind, our October forecast of only around 1% real GDP growth in 2023 is firming up.

Worryingly for the longer-term outlook, renewable projects of only 860MW (potentially 1000MW) have been advanced to preferred-bidder status following the last bid window. The round would have allowed for about five times the amount of MW to be allocated. Furthermore, not a single wind power project has been appointed, despite a significant number of bids.

On the global front, an encouraging development was the announcement of wide-ranging relaxations of strict pandemic controls in China. This news broke on the same day that Chinese November external trade data showed steep contractions in exports and imports, increasing concerns about global growth – more on this in the international section. The move away from the zero-COVID policy in China is not without risk as about 90 million Chinese (including manyelderly) are not sufficiently protected by vaccination.

Combined with low levels of previous infection, herd and natural immunity in China is lower than seen in many (most) other countries at the time of reopening. A steep winter wave of infections risks overwhelming the Chinese healthcare system which is geared towards zero-COVID and there is also the possibility of new variants should infections spike. Therefore, while Chinese reopening will no doubt eventually boost global growth, the initial phase is likely to be bumpy. This could include household hesitancy to venture into mails etc. and worker absenteeism that could revive supply shortages and rekindle inflationary pressure.

For now, recent pro-growth narratives from policymakers and suggestions of further stimulus to the real estate sector have boosted Chinese stocks. In contrast, US and European stocks ended the week in the red, while the JSE ALSI squeezed out a 0.3% w-o-w gain.

*This is an extract from the Bureau for Economic Research (BER) Weekly Review, a division of Stellenbosch University (12 December 2022).