What South Africa’s shrinking GDP really means for households and the economy - IOL

South Africa is still struggling to turn its stronger economic indicators into sustained growth and jobs.

South Africa’s economy went backwards in the second quarter, but the 0.2% contraction does not tell the full story of what is happening in households.

Just before the latest gross domestic product (GDP) figures were released, IOL’s Economic Health Index took a broader look at 10 measures of the economy, giving the greatest weight to growth and jobs.

The result was a mixed picture. Trade, the rand and electricity supply were among the stronger indicators, while weak growth, unemployment and subdued business confidence weighed heavily on the index.

GDP has now filled in an important part of that picture – and, in some respects, made the contradictions even more apparent. The economy contracted by 0.2% in the second quarter, its first decline since the third quarter of 2024, as mining, manufacturing and trade went backwards.

Yet household spending increased 0.4%, contributing 0.3 percentage points to growth and cushioning what would otherwise have been a considerably larger contraction.

PSG senior economist Johann Els said the headline GDP number also needs to be viewed alongside gross domestic expenditure, which measures spending within the economy.

Net exports subtracted 1.1 percentage points from GDP as imports surged 4.9%, compared with a 0.9% increase in exports.

Els said domestic expenditure had been more stable, questioning the significance attached to whether another negative quarter would put South Africa into a technical recession. “Recession or no recession; doesn't matter. I mean, that's, that's not really a question,” he said.

The latest current account figures reinforce the extent of the external hit.

South Africa moved from a R181.6 billion current account surplus in the first quarter to a R205.5bn deficit in the second, as the value of imports jumped by R376.6bn, largely on the back of higher fuel prices.

For South Africans, the GDP figures show consumers remained surprisingly resilient despite the economic contraction. Household spending rose 0.4%, with food and non-alcoholic beverages among the strongest categories.

This broadly backs up what IOL’s pre-GDP index found.

Real retail sales were still growing, and fast-moving consumer goods sales volumes increased in the first half of the year, even as consumer confidence plunged to minus 19.

Investec economist Lara Hodes said the confidence figures showed households were reluctant to make major purchases, while spending on semi-durable goods had declined.

The restaurant trade offers another indication of caution. Stats SA figures show real food and beverage income fell 0.7% in the second quarter compared with a year earlier, while restaurants and coffee shops declined 1.9%.

Property provides a more positive indicator for those who already own homes.

Statistics South Africa data shows that residential property prices increased 7.9% nationally in April from a year earlier, although the gains were uneven, ranging from 11.2% in the Western Cape to 4.8% in Gauteng.

More recent BetterBond data suggest the momentum continued, with home loan applications 11.3% higher than in late 2023 and approval rates rising to 64.5% by the end of August. BetterBond also found homebuying had become more affordable for most age groups as the ratio between house prices and incomes declined.

The biggest weakness identified by IOL’s index before the GDP release remains employment.

South Africa’s unemployment rate rose to 33.6% in the second quarter, from 32.7%, as the number of unemployed people increased by 345,000 to 8.5 million. Employment declined by 16,000 to 16.74 million.

The Altron FinTech Household Financial Resilience Index provides another view of what employment losses mean at household level.

It found household finances were stronger than a year earlier, helped by lower interest rates, but weakened during the first quarter as employment, private-sector salaries and household spending came under pressure.

Formal-sector employment fell by 190,000 during the quarter, while life insurance policy surrenders increased 24.3% from a year earlier.

IOL's economic health index paints a mixed picture of indicators.

Altron FinTech MD Johan Gellatly said employment was driving the deterioration. “Households are not spending their way into difficulty; they are running out of earners,” he said.

The GDP figures do not yet show a collapse in household spending, but the sectors behind the contraction are also significant employers.

Mining contracted 3% during the second quarter, manufacturing fell 1.8% and trade declined 1.9%. The latest figures show mining weakness has since deepened, with production falling 7.5% year-on-year in July, led by platinum group metals, coal and iron ore.

Manufacturing offered some relief, with production increasing 1.1%, although Hodes noted that the improvement was not broad-based and confidence among manufacturers remained subdued.

The other warning sign is investment.

Gross fixed capital formation – spending on assets such as machinery, equipment and infrastructure that expand future productive capacity – declined 0.2% in the second quarter, its second consecutive quarterly fall. Private businesses and public corporations both reduced investment.

That weakness has not escaped government.

The third phase of the Government-Business Partnership launched this week is explicitly aimed at moving from stabilising electricity, logistics and other constraints towards investment, economic activity and employment.

Its immediate target is growth above 3%, with a focus on labour-intensive growth and expanding industrial capacity. For now, however, the post-GDP picture looks remarkably similar to the one IOL’s index produced before the figures landed.

Consumers are still spending, property prices are rising and improvements in electricity supply remain intact. But the economy has contracted, investment remains weak and unemployment has risen.

The latest numbers therefore leave the central weakness identified by IOL’s Economic Health Index relatively unchanged: South Africa is still struggling to turn its stronger economic indicators into sustained growth and jobs.