Slowing growth as the South African economy labors under local and global headwinds
• South Africa’s growth: The South African economy’s real GDP was 0.9% higher in H1-2023 than it was during the corresponding period in 2022. The muted GDP growth rates recorded during both the first and second quarters of 2023 indicate the South African economy is struggling under the strain of ongoing global and local headwinds. We expect growth to register approximately 0.8% in 2023 as a whole.
• SA international investment position: South Africa’s positive net international investment position increased during the first quarter of 2023 as the increase in foreign assets surpassed that in foreign liabilities. Over and above the increase in both domestic and foreign stock market indices during the Q1-2023, the depreciation of the rand had a marked impact on foreign assets and, to a lesser extent, foreign liabilities. However, ongoing elevated interest rates, the rand’s weakened state and heightened geopolitical risks are some of the numerous factors continuing to impact both the country’s inward and outward investments, and therefore its investment position.
• Production: There was increased activity in 6 out of 10 of South Africa’s main economic sectors. While agriculture underwent a notable recovery during Q2-2023, the outbreak of bird flu in the country, and the resultant culling of chickens as well as the egg shortages, is having a profoundly negative impact on the poultry industry. Similarly, while the increase in manufacturing production was largely broad-based in Q2-2023, the PMI remained below the neutral 50-mark point in Q3-2023, suggesting subdued activity.
• Households: Consumption expenditure by households is struggling under slower growth in household real disposable income. Real compensation of employees is deteriorating as high inflation erodes compensation gains, while household savings buffers also dwindle.
• Investment: Growth in gross fixed capital formation remains robust. Going forward, investment growth will continue to be supported by both the private and public sectors, with the bulk of this expected to be tied to investment in renewables on the part of the private sector. In the public sector, however, increasing debt service costs are likely to reduce the resources available for government infrastructure initiatives.
• Employment: There were notable increases in employment in the second quarter of 2023, with the number of employed individuals nearing pre-COVID levels of 16.4 million. This marked the seventh consecutive increase since Q4-2021.
• Inflation: South Africa’s annual consumer inflation rate picked up in September 2023. The uptick represented the second consecutive rise in headline inflation following four notable consecutive declines from April to July 2023. Risks to inflation remain on the upside. Nonetheless, the inflation rate is still 0.6 of a percentage point below the Reserve Bank’s upper band of the inflation target range.
• Interest rates: The South African Reserve Bank’s Monetary Policy Committee (MPC) voted to keep the benchmark interest rate unchanged for the second consecutive meeting in September 2023. On account of ongoing inflationary pressures, alongside elevated global interest rates, we expect the Reserve Bank to keep South Africa’s benchmark interest rate elevated for some time.
• Exchange rate: The South African exchange rate has been experiencing marked pressure against the US dollar. The country has experienced significant outflows of capital, which has had a negative impact on the exchange rate of the rand. Ongoing domestic economic weaknesses have added to downward pressure on the South African exchange rate. In addition, as monetary policy becomes less synchronized amid disinflation momentum's unfolding at differing speeds globally, there has been increased exchange rate volatility, including that of the rand.
• Fiscus: The Medium Term Budget Policy Statement (MTBPS) affirms government finances are worse-off amid lackluster economic growth and lower commodity prices, while spending pressures intensify in the run-up to the 2024 national elections.
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