Durban, South Africa – April 16, 2022: Massive wreckage in the port of Durban after heavy rain, mudslides, rain and wind in Durban. The port serves as a bulwark for Durban’s economy.
Rajesh Jantilal/AFP via Getty Images
South Africa’s economy gained momentum in the first quarter of the year, but historic floods in a key province and the threat of unprecedented power outages are halting its recovery.
The port city of Durban and the broader KwaZulu-Natal region in eastern South Africa was besieged by the country’s worst flash floods in decades in April, killing hundreds and stifling shipping at sub-Saharan Africa’s busiest port.
The Absa/BER manufacturing PMI – after hitting a record 60.0 in March – fell to 50.7 in April, its lowest reading since the violent riots that followed the arrest of former President Jacob Zuma in July last year.
KwaZulu-Natal, South Africa’s second most populous province, was also the epicenter of the country’s worst riots since the end of apartheid.
The S&P Global Composite PMI also fell to a four-month low, and in a note last week, Capital Economics highlighted high-frequency data indicating that the recovery in mobility has stalled.
The numbers for the first quarter paint a mixed picture, according to JPMorgan economists Stimbiso Nkalanga and Sonia Keeler, but point to 3.5% seasonally adjusted quarterly GDP growth.
However, the dismal April PMI showed a downside risk to JPMorgan’s forecast of 1.5% GDP growth for the second quarter. Besides the global backdrop of the war in Ukraine, spiraling inflation and Chinese supply difficulties, South Africa is also dealing with domestic shocks from floods and electricity rationing.
Much of the decline in the manufacturing PMI focused on ports and manufacturing activity in KwaZulu-Natal, where manufacturing activity fell from 60.5 in March to 39.6 in April.
Load shedding – the deliberate shutdown of power in parts of the electricity system to prevent disruptions when burdens increase – was expanded dramatically in April, with this year’s blackouts expected to exceed the already large amounts seen in 2021.
JOHANNESBURG, South Africa: A sit-in by Soweto residents near the entrance to the state entity’s Eskom offices at Megawatt Park in Midrand, near Johannesburg, on June 9, 2021 due to ongoing power outages. Eskom announced, on June 9, 2021, that it will implement a nationwide blackout due to increased consumption as cold weather sets in and two power plants are down.
Photo by PHILL MAGAKOE/AFP via Getty Images
Even as the floods have largely receded, blackouts are a persistent problem for the South African economy.
Jason Tuvey, chief emerging markets economist at Capital Economics, noted that the state-owned utility Eskom’s electricity availability factor – which measures available electricity as a share of the maximum amount of electricity that can be produced – has stalled near record lows in recent weeks.
Public Enterprises Minister Pravin Gordhan has warned that Eskom may resort to the eighth phase of load shedding, which could lead to blackouts of up to 12 hours a day, in order to avoid a complete collapse of the country’s power grid.
“Some shocks such as floods are clearly out of control, but even without them, the recovery will continue to falter as long as issues such as those affecting the electricity sector remain unresolved,” Tuvey said.
The IMF forecasts real GDP growth, adjusted for inflation, of 1.9% for South Africa in 2022.
On Thursday, Eskom announced the implementation of the second phase of load shedding between 5 p.m. and 10 p.m. local time.
“The onset of winter has seen an increase in demand and this will lead to capacity constraints during this period, particularly during peak evening and morning periods. Unfortunately, this will generally require carrying out load shedding during peak evening periods,” the company said in a statement.
Eskom emphasized that load distribution was a “last resort to protect the national grid” and urged South Africans to continue to use electricity “in moderation”, particularly in the early morning and evening.
Q2 contraction potential
The government declared a state of disaster in response to the floods and began efforts to repair the damage.
“However, we expect the slip in April to reverse more slowly than the rapid recovery seen after the turmoil last July, given the damage to road infrastructure, as well as delays at ports,” JP Morgan’s Nkalanga and Keeler said in their recent research note. . .
“In the meantime, energy availability has fallen significantly this year, increasing the risks of prolonged blackouts, while the consumer resilience that is likely to drive GDP growth in the first quarter of the year should fade this quarter due to pressure Purchasing power.”
Against this background and the sensitivity of the South African economy to changes in external market conditions, including global supply chain problems, potential growth slowdown in China and the war in Ukraine, JPMorgan sees “an increased risk of slower GDP growth or even a contraction of this quarter.”