Although South Africa’s medium-term economic prospects remain lukewarm, leading indicators suggest that a cyclical recovery is brewing.
According to Reza Hendrickse, portfolio manager at PPS Investments, the economy is at a cyclical inflection point, with growth set to recover and expected lower interest rates poised to further stimulate the economy.
“Economic growth remains well below potential, but, like other parts of the globe, domestic economic growth will also accelerate, albeit off a depressed base,” Hendrickse said.
“Electricity supply has stabilised, and the past 100-plus days have been free of load shedding. If maintained, this alone will lift growth noticeably this year, leaving the IMF’s 0.9% forecast for 2024 (compared to 0.6% last year) open to upward revision.”
At its 2024 Medium Term Budget Review, South Africa’s Treasury revised its growth forecast for the next three years to an average of 1.6%, up from the 1.4% average expected at the 2023 Budget Review.
With inflation now under control, the “dovish pivot” from the South African Reserve Bank could soon start to lower consumers’ debt servicing costs, when interest rates eventually come down, boosting disposable income.
The stronger rand, in the wake of the formation of SA’s coalition Government of National Unity (GNU), is a further boost to confidence in the economy, says PPS Investments.
“This may indicate that a catalyst for accelerated pro-growth structural reform in SA is on the horizon. We are not oblivious to the deep structural challenges faced by SA, but we are nonetheless encouraged by the direction of travel for now,” Hendrickse added.
Another leading investment firm, Investec, says that in addition to the load shedding reprieve, the GNU has lifted the potential for a stronger economic outlook, while reducing fiscal risk.
“The downside risk has meaningfully reduced as fiscal consolidation is a fundamental tenet of the newly established Government of National Unity (GNU) in South Africa, with the risk of a shift to the left and fiscal deterioration avoided.”
This should prove positive for investment sentiment, money markets and the local currency.
Consumers remain cautious
However, PWC’s global strategy firm Strategy& warns that on the ground, South African consumers remain cautious about the country’s economic outlook for the remainder of 2024. For this reason they continue to be price sensitive and will continue to prioritise essential products over luxury goods.
Although inflation has been easing, consumers have still experienced a decline in buying power due to elevated inflation, Strategy& said in its Economic Outlook for July.
“According to the Bureau for Economic Research (BER), salaries and wages increased by 3.8% in 2022 and 4.6% in 2023 while inflation averaged 6.9% and 5.9%, respectively. This resulted in a cumulative decline in consumer buying power of 4.6% during 2022-2023,” Strategy& said.
“This year, salaries and wages are expected to increase by an average of 4.9%, according to the BER Survey of Inflation Expectations 2024 Q2, while our inflation forecast is 5.3%. This would result in another 0.4% decline in real (inflation-adjusted) consumer buying.”