After a year of floods, strikes, soaring inflation, rising interest rates and record load-shedding, South Africans could be forgiven for thinking the economy must have hit rock bottom in 2022, and that this year will surely be better.
Unfortunately, the most recent Thomson Reuters consensus forecast is that South Africa will experience a V-shaped growth path, starting from 1.8% last year, dipping to 1.2% this year and then recovering to 1.8% in 2024.
Bureau for Economic Research (BER) chief economist Hugo Pienaar says the country’s fortunes this year will be determined by “a tug of war” between persistent load-shedding and a notable slowdown in global growth on the one hand, and a positive spurt of local green energy investment on the other.
The BER has pencilled in healthy private sector fixed investment growth of 4.7% year on year in 2023, as some of the expected private sector renewable energy projects begin to come on stream.
“If you want to carry on in South Africa, you have to become less reliant on Eskom,” says Pienaar. “And, now that licensing requirements have become less onerous, we could start to see a boom in green energy investment.”
However, the BER expects the country’s real export growth to contract by 2% y/y as a result of the expected global slowdown, load-shedding, which is likely to be at least as bad as last year, and lingering freight rail problems at Transnet.
The final outcome depends on whether the push from green energy investment is stronger than expected, and whether the drag from load-shedding and the global slowdown turns out to be weaker. If so, the economy could grow a bit stronger than expected. More likely, however, is that South Africa will need to get past a rather bleak 2023 before it sees a decisive pick-up in growth.
“Global conditions are having an impact, inflation hurts, and power outages are only souring things more,” says Citi economist Gina Schoeman. She expects economic activity to slow to 1.4% this year before rebounding to 1.9% in 2024.
Schoeman notes that, in addition to load-shedding and fixed investment, the key determinants of South Africa’s growth rate will be commodity price movements, especially of oil, as well as the extent of rand weakness, as this will influence how rapidly inflation comes off and how soon the Reserve Bank will be able to relax its hawkish stance.
But the pick-up in fixed investment will be the “golden key”, she says. “If South Africa can get [the self-generation and renewable energy fixed investment] story right, we have a chance of moving growth back up to our historical average of about 2.5%.”
This doesn’t mean Schoeman isn’t “incredibly worried” about the capacity of the economy. But she believes it is important to acknowledge that the private sector has never before been as involved in areas of the economy that were previously reserved for government. Moreover, for the first time, the country has absolutely no choice but to press ahead with the reform and restructuring of Eskom.
Old Mutual economist Johann Els is typically upbeat about South Africa’s prospects. He believes the consensus forecast doesn’t give enough weight to “the emerging positives”.
Els defends his above-consensus 2% growth forecast for 2023 on the basis that rebounding private sector fixed investment is likely to be a strong growth driver. He is also hopeful that private sector participation in energy, railways and ports will gain more momentum, and that easing inflation will support consumer spending.
Prior to the Phala Phala scandal — the theft of foreign currency from President Cyril Ramaphosa’s Limpopo game farm — Els was hoping for a relief rally if Ramaphosa achieved a strong win at the ANC’s December elective conference. This, he said, would likely boost expectations of faster reforms.
Still, while Ramaphosa’s grip on power within the ruling party has strengthened, Phala Phala remains a weak spot. The affair has also rattled business confidence and undermined South Africa’s investment prospects and growth outlook.
According to the BER’s political constraint survey, more than 75% of manufacturers cite the general political climate as an obstacle to investment in South Africa (see graph).
But perhaps where Els differs most from the consensus is in expecting a rebound in China’s growth, despite concern over the country’s loss of momentum as it attempts to balance a relaxation of its zero-Covid policy against increasing infections, protests and property market woes.
While most expect these factors to keep China’s growth below trend in 2023 and 2024, if Els is right this would offset some of the negative impact on South Africa from the slowdown in Europe and the US. It would also put a floor under falling commodity prices.
Global conditions are having an impact, inflation hurts and power outages are only souring things more
— Gina Schoeman
The performance of the global economy is going to be crucial, especially that of South Africa’s major export markets, which all face serious headwinds.
The International Monetary Fund (IMF) expects about a third of all countries to experience an economic contraction this year, having revised down its global GDP forecast from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023.
This is the IMF’s weakest global forecast since 2001, excluding the global financial crisis and the acute phase of the Covid pandemic.
The latest Economic Outlook from the Organisation for Economic Co-operation & Development (OECD) is even worse. The group expects the global economy to slow to just 2.2% in 2023 before recovering to a still sub-par 2.7% in 2024, as persistent inflation, high energy prices, weak real household income growth, falling confidence and tighter financial conditions curtail growth.
“We are dealing with a major energy crisis,” OECD secretary-general Mathias Cormann said during the report’s launch late last year. “Risks continue to be tilted to the downside with lower global growth, high inflation, weak confidence, and high levels of uncertainty making successful navigation of the economy out of this crisis ... very challenging.”
The best way to improve the global outlook would be an end to the war and a just peace for Ukraine, he added. Only, most geopolitical forecasters see no prospect of that happening any time soon.
Still, global growth could surprise on the upside. So far, a warmer-than-expected European winter has reduced fuel consumption in that region. And a faster relaxation in Covid regulations in China or stronger real wage growth in the US could also bode well for the global economy, says Momentum Investments economist Sanisha Packirisamy.
But what if everything goes wrong at the same time?
“Stickier inflation leading to additional interest rate tightening, a colder European winter that enforces more energy rationing, an extension of China’s zero-Covid strategy, renewed Chinese property sector woes, or an accelerated decoupling between the US and China, could all leave global growth at a mere 0.5% in 2023,” she warns.
The SA economy is going to battle in 2023 thanks to load-shedding and the global slowdown, but it should pick up again from 2024 as these forces wane
— What it means:
South Africa’s most bearish economist, Jeff Schultz of BNP Paribas, worries about the return of stagflationary conditions in South Africa not just because major developed countries are facing recession, but also because of the country’s own structural growth rigidities and very low growth potential.
He is forecasting that domestic growth will drop to just 0.2% in 2023, followed by a mild recovery to 1% in 2024.
“The bottom line is that we are expecting recessions (albeit shallow) in both US and European markets, a slower pace of global disinflation, and central banks that are compelled to keep rates in restrictive territory for longer,” he says.
Schultz is particularly pessimistic on inflation. He expects it to fall back below the 6% upper limit of the Bank’s target band only late in the second quarter of 2023, keeping policymakers hawkish even as growth slows. He also expects the Bank to be more sensitive to rand vulnerabilities this year, limiting the room for rate cuts until the second half of 2024.
The Thomson Reuters consensus is that the Bank will stop hiking in the first quarter of this year when the repo rate reaches 7.25 basis points (bp). It will remain at this level until the fourth quarter, when a 25bp cut will take it back to its current 7% level.
The good news is that, by 2024, the BER expects the combination of a global recovery and a more robust surge in private sector green energy investment (from 4.7% y/y to 7% y/y) to push South Africa’s annual growth rate closer to 2%. Domestic consumer spending should also start to perk up by then, as inflation retreats more convincingly.
Private fixed investment should remain elevated at 7% in 2025 and could even hit 7.5% in 2026, says the BER, noting that the mining sector alone plans to undertake energy self-generation projects worth R100bn.
While this is going to translate into faster growth, Pienaar cautions that “it’s not going to be a broad-based upswing in private investment because firms are feeling more confident about policy certainty or reforms”.
In other words, it won’t be expansionary new investment like a new mine; it will be a solar plant next to an existing mine.
Even so, it does mean that it is not unreasonable to expect the South African economy to grow by about 2% from 2025 to 2027. Compared with the pre-Covid slowdown and present dysfunction, this would constitute a welcome recovery. The country just has to get through the 2023 slump first.
Brace yourselves.
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