SA’s recession re-emphasises power sector’s role in driving economic growth

South Africa posted a negative growth of 1.4 percent in the fourth quarter of 2019, down from a revised contraction of 0.8 percent in the third quarter, pushing the economy into its second recession within a space of two years.

Africa’s second-biggest economy reported widespread quarterly contraction in almost all key sectors of the economy including manufacturing, education and transportation, as the economy continues to suffer power woes due to the insolvent state of its state-owned utility, Eskom.

The agricultural sector contracted as much as 7.6 percent while transport and communication printed a negative growth of 7.2 percent, data released by the country’s statistical agency showed.
Similarly, economic activities in the construction, electricity, gas and water, and trade sectors all shrank by 5.9 percent, 4 percent and 3.8 percent, respectively, while both manufacturing and the government sector contracted 1.8 percent and 0.4 percent.

The economy only managed to expand in its finance, mining and personal services at a marginal growth of 2.7 percent, 1.8 percent and 0.7 percent, respectively.

“South Africa’s disappointing GDP numbers were on the back of lack of pro-growth policy reforms and debt-ridden Eskom,” said Damilola Adewale, a Lagos-based economic researcher.

“This majorly has crippled economic activities in the state as companies cannot operate efficiently due to power cut,” Adewale told BusinessDay on phone.

South Africa’s state-funded power utility, Eskom, has been faced with a huge financial crisis with a debt of over $30 billion, a development that has crippled power supply and brought economic activities to a halt.
For the past one and a half years, the southern African country has witnessed power cuts, and this has weighed greatly on its output and business confidence, an almost similar situation being faced by multinational companies and Micro Small and Medium Enterprises (MSMEs) operating in Nigeria.

South Africa’s full-year GDP expanded 0.2 percent in the 2019 calendar year, a decline when compared to the 0.8 percent growth recorded in 2018.

With this, South Africa no longer vies with Nigeria as the continent’s giant, after Nigeria last week reported its biggest growth in four years. The country also overtook Nigeria to earn the mantle as being the most miserable African country to live in, according to the 2019 Hanke’s Annual Misery Index.
But Nigeria and South Africa have shared similar fortune in terms of slower economic growth, after a collapse in oil price pushed Nigeria into recession in 2016.

The slower growth seen in both two countries propelled the International Monetary Fund (IMF) into placing both among the list of economies with slow growth prospect in sub-Saharan Africa.
Although Nigeria has exited the recession as seen from the gradual uptick of economic activities, growth in the country is still fragile.

The country’s growth at 2.27 percent in 2019 was the fastest since the recession era, but it was largely driven by the oil sector, with recovery not being broad-based as some critical sectors are still either weak or remain in recession.

The oil sector expanded at an average of 4.59 percent in 2019 from as low as 0.97 percent in the preceding year, meanwhile, the non-oil sector which accounts for about 91.2 percent of Nigeria’s GDP remained flat at 2.06 percent from a 2.00 percent growth in 2018.

But the poor economic outing of SA, which has been held down by Eskom’s fiscal woes, sure holds a lesson for Nigeria gradually picking up in the wake of epileptic power supply which has increased companies’ operating cost and lowered productivity. It shows Nigeria’s economy has the potential to grow at a much faster pace if electricity gets a facelift.

Poor power supply has been the biggest headache for manufacturers in Africa’s biggest economy, according to Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), an advocacy group which have over 2,000 businesses as its members.

Data published by the Manufacturers Association of Nigeria (MAN) show that in 2017, manufacturing companies in Nigeria spent as much as N117.38 billion in fuelling their plants to run daily operations. This affected their ability to expand operations, acquire new machinery to produce more in order to give juicy returns to shareholders. More worrisome is the fact that the money was spent basically on alternative energy sources.

The nexus between increased power supply and productivity is clear. When there is a steady energy supply, operating costs of manufacturers fall, leading to the production of more products at a lower cost that can compete locally. The lower price of products would help increase consumer demand. The increased demand would enable manufacturers to employ more labour to meet the demand. This would generally lead to a fall in unemployment as more and more of the populace would be gainfully employed. An increased output accompanied by falling unemployment that was triggered by higher consumer demand would push aggregate output upward.