In 2022, South Africa’s economy was marked with uncertainty, volatility and a series of global and local disruptions. Unsurprisingly, power outages continued to directly and indirectly be the leading cause of poor economic performance. The country’s economy shrunk more than expected in the last quarter of 2022, declining by 1.3% following an increase of 1.8% in the previous quarter. Seven of all ten sectors contributed to this negative growth. According to StatsSA, the finance sector was the biggest contributor to the decline, with a significant 0.6% drop on the back of lower economic activity in financial intermediation activities. The trade sector was next with a decline of 0.3% due mainly to negative performance in wholesale trade.
Durban’s GDP decreased by 1,1% in the fourth quarter of 2022, following a rebound of 1,7% in the third quarter. Looking at the level of production between 2019 and 2022, gross value added lagged pre-pandemic levels of output by R4,734bn (1,2%). Five sectors contributed to this lag, most notably construction and manufacturing. Given the persistent loadshedding in Q1 of 2023 and the announced return to “normal” loadshedding from 25 May 2023, it is possible that Durban may slip into recession in the first half of 2023.
GDP growth in the construction sector has not yet shown signs of rebound. However, it is worth noting that the construction sector was underperforming before the Covid-19 pandemic, with a consistent shrinkage evident since 2017 due to subdued investor confidence, and the downward trend in public sector infrastructure spending. In addition, the significant increase in vacant land rates continues to have a knock-on effect on the struggling construction industry.
However, there appears to be a positive response to the resumption of most infrastructure projects as the economy stabilises from multiple shocks, major investments are announced in Durban, and the construction of major catalytic projects kick off. UKZN’s Macro Economic Research Unit reports that the business confidence index in Durban’s construction sector experienced the largest improvement of all sectors, increasing from 33 in the fourth quarter of 2022 to 66.04 in the first quarter of 2023. This may be a positive sign of improvement in the sector, in advance of mega projects such as Transnet’s expansion of the Durban Port planned to commence in the second half of 2023, and construction at Investec’s The Brickworks Industrial Park site.
Nonetheless, power outages have spared no sectors and manufacturing is amongst the most impacted. During 2022 there were 200 days of loadshedding with Q4 2022 being the worst on record. The manufacturing sector is the third largest sector in Durban, making a significant contribution to the City’s GDP. The City has lost a number of investors in the manufacturing sector, due to the unrest, floods and issues around service delivery. Loadshedding has added to negative business confidence which continues to be a major threat to the local economy.
Ongoing global blockages and over-reliance on the foreign trade supply chain have undermined growth prospects in the transport sector. Regardless of this, business confidence in the transport, storage and communication sector, rose by 15.44 index points, from 51.44 in the fourth quarter of 2022 to 66.88 in the first quarter of 2023; indicating a possible uptick in business orders in its industries.
The decline in the trade sector is a result of price inflation that has risen over the inflation target band of 3%–6% in the last quarter of 2022. The high cost of living, and the increase in global food and fuel prices have left consumers with less purchasing power. Retailers and consumer goods companies are likely to struggle in 2023 as they increase their spending on alternative energy sources which will in turn increase the cost of doing business. This is likely to impact the margins and profitability of retailers and as a result, consumers are likely to face more price hikes.
The 50 basis point increase in the repo rate to 8.25% per year- effective 26 May 2023; is the 10th consecutive increase since November of 2021, and will also negatively impact the affordability of both businesses and consumers alike.
The electricity tariff hike of 18.49% comes at a time when the economy is struggling to stabilise due to power shortages, high interest rates, sluggish growth, and high inflation. The City proposed an electricity tariff hike of 21.91% on businesses and a further increase on municipal services and rates i.e. water, sanitation, and property rates. This places an extra burden on business owners who are already struggling to generate enough cashflow and keep businesses afloat. The intensified loadshedding persists to depress economic growth with company liquidations shooting up over 30% in December 2022 year-on-year and 6,6% in the last quarter of 2022 when compared with the last quarter of 2021. This is an indication of how businesses end up in financial distress with no capital, due to being greatly impacted on by loadshedding. Immigration consultants affirm that due to the current economic climate, South African business owners are looking to take their businesses elsewhere to escape rising operating costs caused by load shedding. Businesses highlighted the cost of doing business as being one of the reasons, stressing that additional costs associated with keeping business operations are too high. This included purchasing high- end generators and fuel, battery storage, or solar panels just to keep operating.
In 2023, Toyota announced that it will invest R714mn in solar energy infrastructure at its Prospecton factory to move off the grid in the long term due to loadshedding. Advanced Call Center Technologies (ACT) is developing a Customer Contact Centre in Durban and will employ 1 000 agents who will serve many Fortune 50 brands. This is part of the company’s larger investment portfolio into South Africa over 5 years. The Invest Durban Unit of the City is also engaged in investment attraction & facilitation of 13 planned investments, including 3 investments in Global Business Services (formerly BPO), 1 investment in logistics and maritime projects, 4 investments in manufacturing, including a mega investment valued at R1bn, and 5 investments in the green economy including $3-$5 billion mega investment with 6000 jobs. Also included, are the commitments already announced by President Ramaphosa in the 2023 SA Investment Conference; including investments in the food and beverages industry by both Heineken and RCL. This, as well as the expansion of the Port of Durban, and the planned kick off of construction on some catalytic projects provides hope against an otherwise gloomy outlook.
South Africa's economy was hampered by loadshedding over 2022, together with other global and local economic challenges, causing levels of production to deteriorate more than expected. Economic recovery is highly dependent on the recovery of key sectors. Should these sectors continue to underperform the economy will continue to struggle in 2023 raising the possibility of a technical recession. Durban’s economy is greatly dependent on the manufacturing sector and there is a need for local government to develop measures to boost investment and energy efficiency in this sector. Likewise, increasing spending in the construction sector by implementing catalytic projects, improving there liability of the local electricity grid in the South Durban Basin and spending on the reconstruction of water and sanitation infrastructure appears to be the most significant action required at a city level and can create a positive ripple effect across the City’s economy. It is also important that Provincial Government steps up repairs to critical roads and bridges damaged in the April 2022 floods which are currently derelict. The City remains committed to ensuring that it provides the region with a secure electricity supply and has made plans to mitigate the impact of load-shedding. The City has presented its Energy Transition Plan at the Energy Summit which includes the reduction of its reliance on ESKOM's national grid by up to 20% by 2025 through public-private partnerships with independent power producers (IPP) at a lower cost than current ESKOM tariffs.