Economic activity is expected to gain momentum later this year following newly announced far-reaching reforms in the energy sector, in spite of early signals indicating disruption in the second quarter.
The composite leading business cycle indicator, released by the South African Reserve Bank (SARB), decreased by 0.7 percent in May following an upwardly revised 0.8 percent decline in April.
Decreases in seven of the 10 available component time series outweighed increases in the remainder as the business cycle in the second quarter remained affected by the floods in KZN in that quarter, along with a base effect of strong activity a year ago.
The SARB said the largest detractors were decreases in the US dollar-denominated export commodity price index as the exporting sector faces significant downside risks from faltering global demand, notably from China.
The number of residential building plans approved also declined, while an acceleration in the six-month smoothed growth rate in job advertisement space and a widening of the interest rate spread made positive contributions.
The leading indicator of future economic activity fell by 8.5 percent in May after a revised drop of 5.4 percent in April.
Investec chief economist Annabel Bishop said the impact of the Russian/Ukraine war and economic lockdowns in China negatively affected supply chains and slowing global growth affected the reading, as did load shedding.
“Regulatory hurdles and the extremely slow pace of state bureaucracy have impeded the development of the private energy sector, and a large-scale crowding in of private-sector generation is rapidly needed,” Bishop said.
“A competitive energy market is envisioned, along with a strong increase in renewable energy investment.”
Meanwhile, the business industry and analysts have expressed hope for economic recovery following President Cyril Ramaphosa’s new plan for energy security.
Ramaphosa announced on Monday that the government would fix Eskom and improve the performance of the existing fleet of power stations, accelerate the procurement of new capacity from renewables, and accelerate greater private investment in generation capacity.
“These are major steps that the president has taken and there is now no need for the declaration of a state of emergency or disaster,” said Business Leadership SA.
“The news that Eskom will over the next year increase its maintenance budget to increase the reliability of its power stations is positive, as is cutting red tape to allow the utility to procure parts and equipment more easily.”
Jeff Schultz, senior economist at BNP Paribas South Africa, said Ramaphosa’s plan was decisive action as the state’s back was against the wall.
Schultz said the announcements were positive for the medium-term growth and investment picture.
“We don’t think the reforms change the immediate energy supply gap challenges, with Eskom’s 12-month outlook for energy supply looking increasingly tenuous,” Schultz said.
“However, the move was perhaps balanced by its communication that few of the regulatory relaxations were temporary, probably to soften the criticism from special interest groups.”
“This implies that the government will be prepared to outface criticism from these groups because it considers the trade-offs in favour of solving the damaging load-shedding programme.”
BUSINESS REPORT