SA’s growth (and employment) conundrum

SA’s GDP growth likely to have remained subdued in 1Q23

SA’s GDP growth for 1Q will be released this week, with expectations for fractional growth just enough to stave off a technical recession, after the 1,3% q/q GDP contraction in 4Q22. We forecast 0,2% q/q growth in 1Q.

Fiscal implications of lower growth

The National Treasury (NT) has indicated that it would likely reduce its growth forecasts by the October 2023 MTBPS due to worse load shedding and weaker terms of trade. As reference, our estimates suggest that for every 50 basis points (bps) per annum reduction in growth estimates, the budget deficit widens by, on average, 0,3% of GDP, and the debt-to-GDP ratio rises by, on average, 2% of GDP.

Labour market recovery lags GDP growth

Total employment in the economy is 1,4% (or about 200k) below pre-pandemic levels. SA’s real GDP is about 1% (or R11bn) below pre-pandemic levels (Exhibit 3). GDP and labour market recoveries have differed across the 9 industries, with the financial and business services industry and the agricultural industry the only two industries to have fully recovered, with both its GDP and employment above pre-pandemic levels.

The labour market is structurally weaker

For growth to influence employment meaningfully, actual growth needs to exceed potential (a positive output gap is required). SA’s output gap, measured in five-year intervals from 2008, has never been positive (on a five-year-average basis) during this period, but has improved recently. Despite an improving output gap, SA’s employment elasticity to growth has fallen recently. This means that for every 1% of real GDP growth, employment rose by 0,9%, compared to 1,4% in the five years to 2017.

While fiscal bind remains, current yields reflect this and more

Our analysis also indicated that the current yield curve reflects a scenario where GDP growth, the budget deficit and the debt-to-GDP ratio blow out to levels well beyond our current base case (see The cost to the Budget of playing Russian roulette dated 19 May 2023). While it remains difficult to structurally build a positive narrative for government bonds, cyclically bonds look substantially undervalued.

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