A bright turn for South Africa – with a catch

Economists at Absa say that although South Africa’s economy has proven incredibly resilient in the first half of 2023, the country’s growth prospects should not be overstated.

Things may look better than they were six months ago – but we’re far from being on a stellar growth trajectory.

In its Q3 23 Quarterly Perspective, Absa revised its GDP growth outlook for 2023 upwards, from 0.3% to 0.7%. Despite still being quite low, this adjustment was seen as a positive leap, especially compared to projections from other financial groups.

Nedbank reflects a GDP outcome on par with the South Africa reserve bank at 0.4%, while FNB still has a decline of 0.1% pencilled in (though, but its own admission, the risks are currently to the upside, so its next review may push this higher).

Of all the finance groups, though, Absa is so far the most bullish about the South African economy.

“Despite the sharp escalation in load shedding, economic activity in H1 23 was healthier than we expected,” Absa said.

The group said that the growth momentum seen in Q1 would likely feed into Q2 data, with mining and manufacturing data in particular both seeing better-than-expected performances in June 2023, in real terms, signalling good news for the second quarter.

The group said that the improvements in the energy sector have been underpinning the economy’s resilience.

“Electricity supply will continue to be a growth risk, but we believe that ongoing efforts in private generation will make the economy more resilient over time,” Absa said.

For instance, the number of solar panels in South Africa has grown substantially. Eskom estimates that solar generation has increased from 1,000MW in March 2022 to over 4,000MW in June 2023 – equating to roughly 10% of Eskom’s generating capacity.

In addition, Absa economist Miyelani Maluleke said that non-renewable energy backup power systems – mainly diesel-powered generators – have been used by various households and businesses across the country, which has limited the economic impact of intensified load shedding.

To give credit where credit is due, Eskom has also improved its generation capacity, which can be seen in gains made in the group’s overall Energy Availability Factor (EAF), despite a slight decline in July.

Not all sunshine and roses

Although Absa’s outlook is relatively-positive, Maluleke said that 0.7% growth is still somewhat immaterial, warning that the nation still faces several issues that could hurt economic growth.

Firstly, Eskom’s fleet still remains highly vulnerable and is prone to breakdowns.

“Until Eskom can return some of its generating units that are on long-term maintenance, bouts of load shedding may continue in the near term,” Absa said.

And despite the growth in private generation, Eskom is still the main supplier of electricity and the country’s economic prospects are invariably tied up in its success (or failure).

Moreover, the issues at South Africa’s rails and ports will also continue to weigh on the competitiveness of South Africa’s export sector, especially bulk commodity exporters.

In addition, water unavailability in South Africa, particularly in Gauteng, and the deterioration of municipal service delivery are adding to the weakness in private sector business confidence.

The latest RMB/BER Business Confidence Index (BCI) dropped from 36 in Q1 2023 to 27 in Q2 2023 – the lowest level since 2020, suggesting that only one in four respondents are happy with the overall business conditions in South Africa.

“Without a sustained improvement in business confidence, a broader recovery in private sector investment spending outside energy projects will be slow, in our view. Given the low business confidence, we believe private sector investment spending will return to pre-pandemic levels only in Q2 25,” Absa said.

“A broader investment cycle remains unlikely given the weak business confidence, and we see this continuing to constrain growth prospects.”

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