The fourth quarter got off to a weak start last year and this appears to have carried through to the festive season, with the consumer finally buckling under the weight of high interest rates.
According to a Citibank survey, 44% of consumers spent less this festive season than the previous year, due mainly to crimped incomes, while only 30% spent more.
Citi’s GDP Tracker shows that the economy may already be in a recession.
On the most current data, which excludes December, it puts fourth-quarter growth at -0.1%. Given that the economy contracted by 0.2% in the third quarter, this would mean that South Africa slipped into a mild technical recession in the second half of last year.
Citi economist Gina Schoeman now expects that the economy grew by a miserable 0.5% over 2023 as a whole vs her previous forecast of 0.6%. Last week, the Reserve Bank downwardly revised its 2023 growth forecast to 0.6% from 0.8%.
Absa economist Miyelani Maluleke is more bullish. He thinks the economy avoided a contraction in the fourth quarter and is forecasting quarterly growth of 0.4%.
However, he cautions that big parts of the services sector, including finance and personal services, can’t be easily tracked between GDP releases, and these have been more volatile than usual.
“And then there’s agriculture. Though it’s a fairly small part of the economy, the volatility in this sector can have noticeable effects on the overall quarterly GDP growth rate,” he says.
Maluleke is encouraged by the fact that while the mining sector dragged GDP down in the third quarter, the sector appears likely to boost GDP growth in the fourth quarter, with average monthly mining output in October and November tracking 3.4% higher than the third-quarter average.
Offsetting these gains, however, is the sorry state of the consumer.
Household consumption fell in both the second and third quarters as higher interest rates began to bite. In real terms, retail trade sales declined by 0.9% year on year in November (+0.4% month on month), following October’s 2.3% year-on-year contraction.
If the South African economy avoided slipping into a recession late last year it was by a narrow margin
— What it means:
HSBC economist David Faulkner notes that there was also a further deterioration in consumer sentiment during the fourth quarter.
“This is perhaps unsurprising given the continued rise in household debt service costs, the ongoing decline in credit growth, and private sector job growth that has shown little recovery from its pandemic lows,” he says.
“These consumer headwinds have been partly offset by robust earnings growth and households drawing down on savings, but with the Reserve Bank unlikely to provide rate relief in the near term, we think the sluggish consumer outlook will persist into 2024.”
Even so, Faulkner estimates that the economy expanded by 0.2% in the fourth quarter, thereby narrowly avoiding a recession, and taking full-year growth to a sluggish 0.5% last year.
“An improved energy supply suggests activity could gain over the coming months,” he says. “However, risks to near-term growth are tilted to the downside and may even point to an economy that slipped into a mild recession at the end of last year, reflecting the weak start to the fourth quarter, underlying consumer strains, and damage from binding logistics constraints.”
High inflation is worse for the economy than high rates
— Gina Schoeman
BNP Paribas chief regional economist Jeff Schultz also believes the economy just scraped by, avoiding a recession at the end of last year. But even if it did fall into a recession, he doesn’t think whether growth was 0.5% or 0.3% last year matters too much for fiscal or monetary policy at the margin.
“What’s more important,” he says, “is the political reaction to such an outcome — does it give rise to more political impetus towards economic reform into the elections as the ANC looks to try to mitigate its presumed losses at the polls?”
Schultz is sceptical that it would galvanise reform but believes it’s something to watch, given the importance of this election.
For Schoeman, if the economy entered a recession in the fourth quarter, especially if it was due partly to the high bout of inflation experienced in 2023, then the Bank will likely see it as just one more reason to keep rates higher for longer “because, in the end, high inflation is worse for the economy than high rates”.
“It doesn’t mean they’ll stay high forever but with fourth-quarter inflation expectations ticking higher, a bump up in CPI coming in the first quarter of 2024, and pre-election risks for the rand, the Bank will be especially careful to keep inflation contained,” she says.
She expects a hawkish cutting cycle to start in May, and for rates to fall slowly by 100bp into 2025.
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