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PPS Investments: GDP Q2 commentary

05 September 2023 Reza Hendrickse, Portfolio Manager at PPS Investments

South Africa’s economy grew more than expected during the second quarter of this year, expanding 0.6% in real terms (seasonally adjusted).

Although 1.6% year-on-year growth is nothing to celebrate, the SA economy appears to be holding up reasonably well, considering our electricity situation and the fact that higher interest rates and inflation have left consumers with less disposable income.

Manufacturing was the largest contributor to this quarter’s growth, although “Agriculture, Forestry, and Fishing” was the fastest growing industry. “Transport, storage and communication” on the other hand was the largest detractor, and the industry experienced the largest contraction in output.

We expect economic growth to remain constrained going forward, particularly the second half of the year. Loadshedding is still a major constraint, which may be more evident in the third quarter growth stats, where the colder months tend to give rise to higher electricity demand, placing additional strain on the grid.

The resilience of the SA economy this year comes down to the fact that the private sector is responding to Eskom’s failure by implementing its own power solutions, dampening the loadshedding effect on growth. On top of this, the electricity headwind should have an even smaller impact on growth next year, though there may be other challenges to contend with, such as a potential US recession.

Our portfolio positioning currently reflects the dim South African economic outlook by being conservatively positioned in South African growth assets. One has to however weigh this up against attractive equity market valuations, which already price in a very challenging environment.

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