The South African economy in a precarious state pre-elections
• South African growth: The South African economy’s slowdown continued in 2023 from 2021’s robust recovery – economic expansion in 2023 was just under a third of the growth rate registered in the preceding year. Although it had moderated by the end of the year, load-shedding reached its peak in 2023, resulting in double the gigawatt hours shed compared to 2022, which had a severe impact on the South African economy. While numerous headwinds, of both global and domestic origin, will continue to stifle South Africa’s economic growth in 2024, the impact of load-shedding – arguably the biggest dampening factor on economic growth in the past number of years, especially in 2023, will moderate in the current year.
• Households and the elevated cost of living: South Africa’s insipid growth in 2023 also came about as especially household consumption expenditure, an important component of total GDP that had contributed significantly towards growth in the two preceding years, underwent a notable decline. This came on the back of the marked increase in the cost of living that contributed to the slump in domestic demand.
• Food prices: The “food and non-alcoholic beverages (NAB)” category, which had been one of the main drivers of inflation, has been undergoing significant declines. In addition, producer price inflation for agriculture, forestry, and fishing products points to food prices remaining relatively moderate as it has experienced notable decreases from its peak in October 2023.
• Employment: The number of people employed declined for the first time since the third quarter of 2021, contracting in the fourth quarter of 2023. It nonetheless remains above its pre-COVID-19 level.
• Manufacturing and mining: On account of both mining and manufacturing being especially impacted by load-shedding as they are highly electricity intensive, the improvement in electricity supply during Q4-2023 relative to that during Q3-2023 benefited both sectors during the final quarter of 2023. The impact of the relatively moderate load-shedding should continue into 2024.
• Investment: Regardless of the strong headwinds facing the South African economy, there was still an overall improvement in investment during 2023. However, the upcoming May 29th general elections that are likely to result in the ANC not attaining an outright majority for the first time since 1994 have also been a source of deep uncertainty. These are therefore likely having a detrimental impact on current business confidence.
• Inflation: Overall, the post-pandemic adjustment in inflation is ongoing in South Africa, indicating a considerable level of uncertainty regarding its trajectory. The inflation rate continues to be sticky, which in turn warrants the policy rate to remain elevated despite recent disappointing economic growth numbers. Nonetheless, after edging closer to the upper limit of the Reserve Bank’s inflation target band (3%-6%) during both January and February 2024, consumer inflation stood 0.7 of a percentage point below the upper limit in March.
• Interest rates: South Africa’s current inflation remains largely sticky, and risks to the inflation outlook remain on the upside. In addition, the weaker exchange rate and the decision to keep rates elevated by major central banks, especially on the back of the somewhat sticky inflation, appear to be deterring the SA Reserve Bank from lowering interest rates, with cuts only likely to take place in the final quarter of 2024, if at all this year. In addition, the Reserve Bank has been advocating for lowering South Africa’s inflation target, with the Bank’s Governor noting he would prefer this to be implemented before 2025.
• The fiscus: Tax revenue collection for FY2023/24 was approximately 3.2% higher than the collected revenue during FY2022/23. This represents a notably lower growth rate relative to the preceding financial year’s growth of over 7%. Nevertheless, overall tax revenue collection for FY2023/24 exceeded expectations, and this was due to ongoing improvements in efficiency in tax collection according to the South African Revenue Service (SARS). The tangible outcomes of these efforts are evident in the remarkable growth observed in various tax registers. Still, the preliminary non-financial public sector borrowing requirement increased substantially compared to the previous year, driven by the significantly larger deficit of the consolidated general government. The Treasury announced government’s plans to reduce borrowing over the medium term using a portion of valuation gains in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) during Budget 2024.
• Current account: South Africa’s current account balance widened from a deficit of R30.0 billion in 2022 to a deficit of R112.5 billion in 2023. At the same time, the slowdown in China's economy poses significant challenges for South Africa, particularly due to their substantial trade linkages — China is South Africa’s main export destination largely for the country’s minerals and primary sector exports.
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