The tide is turning in South Africa

 ·5 Dec 2023

South Africa’s GDP has taken a hit, but South Africa’s economy has still performed better than previously expected – and more relief could be around the corner.

According to the latest data from Stats SA, South Africa’s GDP contracted by 0.2% in Q3 2023. This comes after 0.4% and 0.5% growth in Q1 and Q2, respectively.

The figure was between Investec’s prediction of a 0.3% contraction and Nedbank’s and FNB’s prediction of 0.1% growth.

However, considering the negativity and anxiety that surrounded South Africa at the start of the year due to the heightened levels of load shedding, South Africa’s economy has proven remarkably resilient to several major shocks.

“Although year-on-year growth to the end of September is negative (-0.7%), the economy has grown marginally year-to-date compared to the first three quarters of last year,” Reza Hendrickse, Portfolio Manager at PPS Investments, said.

Hendrickse admitted that South Africa’s economy remains constrained, which can be seen in the recent PMI data, but kept an optimistic tone.

“Although growth continues to be unimpressive, it is worth pointing out that growth has managed to exceed expectations in most quarters during recent years. We even managed to deliver muted growth despite 2023 being the worst load shedding year on record and despite numerous other challenges,” he said.

Only in June, FNB predicted that South Africa’s GDP would see a retraction of 0.1% in 2023. However, the bank now predicts real GDP to grow by 0.8% in 2023, even if the GDP contraction challenges this forecast.

“Going forward, economic growth is expected to accelerate next year from this year’s low base. This is largely a function of load shedding easing somewhat as the power crisis comes under control,” Hendrickse said.

“On the consumer side, lower inflation is also positive, while any rate cuts from the SARB should also support spending growth.

“Any softness in global growth next year, however, may put a dampener on temporary respite in SA.”

FNB also expects a gradual lift in GDP next year due to a reduction in load shedding, lower inflation inflation and the projected interest rate cuts from next year.

“Still, targeted and accelerated economic reforms are critical to lift growth and employment, ultimately helping to improve the government’s fiscal position,” the bank said.

According to Adriaan Pask, CIO at PSG Wealth, while the GDP print was lower than expected, much of the cause of the quarterly contraction is well known to markets.

“Protracted load shedding and political uncertainty are expected to continue to weigh on the South African economy and investor sentiment, but these risks are already priced into very depressed valuation levels in large portions of the local market.

“Our outlook for local equities, therefore, remains favourable,” he said.

The downside

Tempering the more positive spin on the GDP data, economist at Nedbank warned that the outlook for the rest of 2023 and into 2024 still remains bleak.

“Load shedding has returned with a vengeance as Eskom resumed regular maintenance and emergency reserves dwindled. Logistical constraints have also intensified. Both will continue to amplify operating costs, erode profits, and weigh down activity,” the group said.

On top of these familiar woes, cyclical headwinds are intensifying.

“Advanced countries are battling the most aggressive monetary policy tightening in decades with varying degrees of resilience, while China’s fading economic recovery clouds the outlook for emerging markets.

“As a result, global demand is slowing, keeping international commodity prices subdued. These challenges will likely hurt domestic exports, sustaining the pressure on the country’s external position.”

The bank also warned that sharply higher domestic interest rates will continue to squeeze household demand, partly outweighing the boost to purchasing power from receding inflation.

“Against this challenging backdrop, companies will be reluctant to expand operations further, resulting in slower growth in fixed investment. However, government spending will be positive mainly due to higher outlays on public sector wages.

“We forecast GDP growth of around 0.5% in 2023 and 1.1% in 2024, with continued downside risks.”

Read: Interest rate joy around the corner for South Africa

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