Electricity, strikes may spoil party

Strikes and electricity constraints threaten an anticipated improvement in economic growth in the coming months, as manufacturing battles after three consecutive quarters of contraction and government spending - the main engine of recovery - slows.

Revisions to Stats SA data released on Tuesday indicated that the economy is 4.4% bigger than previously thought, but showed that its rebound from the recession in 2009 was significantly slower, pointing to a lower sustainable growth rate.

Output expanded by 1.4% in the third quarter - as expected - but changes to the calculation of GDP suggested that it suffered more from a five-month strike in the platinum sector between January and June. The economy shrank by 1.6% in the first quarter, more sharply than an earlier estimate of a 0.6% contraction, while growth in the second quarter was revised down to 0.5% from 0.6% previously. All things being equal, the economy will grow by 1.5% this year, in line with forecasts from the National Treasury and the Reserve Bank.

But this is not a foregone conclusion, mainly because of uncertainty about the reliability of electricity supply from Eskom, which is beset by ageing infrastructure and delays to the completion of its Medupi power plant.

"There is no reason to believe that fourth-quarter growth will be very low because it looks like there will be no strike action, as there was earlier this year," said Joe de Beer, director-general of economic statistics at Stats SA. "But we don't know what the impact will be of power outages on manufacturing and mining."

This is crucial because manufacturing has contracted for five out of seven of the past quarters - including the whole of this year. The platinum strike had knock-on effects on the manufacture of mining equipment and was followed by a one-month stoppage in the metalwork industry.

As a result, manufacturing has been the main drag on growth this year. But the long-term trend is also worrying - the sector's overall contribution to the economy shrank from 18.6% in 2004 to 13.2% in 2013. It is still contracting - during the third quarter it was just 12.6%.

Economists warn that electricity shortages could continue to undermine growth in the next two to three years. The latest GDP figures suggested that the economy's sustainable annual growth rate had dwindled to about 2.5%, and unless energy constraints were addressed, output could grow even more slowly than that, said MacQuarie First South economist Elna Moolman. "There is so much uncertainty about the electricity shortfall - it could prevent us from getting there," she said.

Strikes have also resulted in a sharp spike in wages for manufacturing employees, leading to job cuts, which have added to curbs on output, economists say. The sector shed 38000 jobs in the year to end-September.

The sector that has posted the strongest growth and employment creation over the past few years is likely to be hit by a strike early next year.

The contribution of general government services to GDP rose from 15% in 2004 to 16.8% in 2013, while the sector created 140000 jobs in the past year alone. The public sector wage bill ballooned to 40% of non-interest spending and is the biggest challenge the government faces in cutting its budget deficit and stabilising debt levels.

The Stats SA figures showed that the electricity, gas and water sector also contracted in the third quarter, while growth in agriculture, mining and finance accelerated strongly. The GDP data were rebased from 2005 to 2010 in line with international best practice.