Coffee Table Economics (CTE) with Anchor by Casey Sprake is distributed intermittently. It is a collection of Casey’s thoughts and perspectives on key economic factors, socio-political events, and the multiple dynamics shaping markets globally and in South Africa (SA).
Executive summary
In this week’s edition, we highlight the following:
- A careful and brief waddle through SA’s muddy political puddle: Without running the risk of using hyperbole, it is safe to say that the 2024 National and Provincial Elections (NPEs) have ushered in a new era in South African politics – the era of coalitions. Whilst the likely formation of a government of national unity (GNU) might be one of the more market-friendly outcomes, a GNU agreement would not be without uncertainty or immune to fractious in-fighting. Collaboration between government, business, and labour is required to place the country on a renewed growth path – away from conflict and individual vested interests around growth that will, in turn, create jobs and a thriving economy where everyone benefits.
- SA’s economy weathers a stormy start to the year: SA’s anaemic economy again finds itself in negative territory after narrowly dodging a recession. Surprising slightly on the downside, SA’s 1Q24 gross domestic product (GDP) print contracted by 0.1% QoQ.
- Steady as she goes – amid all the election noise, the SARB keeps a cool head and holds rates steady:With the inflation outlook remaining elevated, unsurprisingly, the South African Reserve Bank (SARB) cautiously kept the repo rate on hold at 8.25% at its third Monetary Policy Committee (MPC) meeting for this year, with the prime rate remaining at 11.75%. We maintain that the SARB’s MPC will not rush to cut the repo rate. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year.
A careful and brief waddle through SA’s muddy political puddle
Without running the risk of using hyperbole, it is safe to say that the 2024 NPEs have ushered in a new era in South African politics – the era of coalitions. The 29 May 2024 election was a watershed moment for the country as it was the first time in democratic history that the ANC lost its majority in government – going from 57.6% in 2019 to 40.2% in 2024. The emergence of ex-president Jacob Zuma’s new M.K. party cut severely into the ANC’s traditional voter base in KwaZulu-Natal (KZN) and eroded support for the former ruling party in Gauteng and Mpumalanga. As a result, there is a need to form complex, multi-faceted national coalitions to govern SA for the next five years. At the time of writing, the ANC appears set to form a GNU, where all parties above a certain threshold are invited to join the ANC in government. This agreement would allow President Cyril Ramaphosa and his allies to accommodate opposing groups within the ANC and effectively ‘unite’ against the M.K. party. Whilst the DA would likely be reticent to work alongside the EFF in such a set-up, the party will be placed in an uncomfortable position due to its well-communicated promise to ‘do everything in its power’ to prevent what it terms the ‘doomsday’ ANC/EFF coalition. Although this is likely to be one of the more market-friendly outcomes, a GNU agreement would not be without uncertainty or immune to fractious in-fighting.
Regardless, election outcomes are only one piece of SA’s increasingly complex economic puzzle. SA has numerous long-term structural economic issues (some of which have already been mentioned), which the government has continually failed to address – at least not to the degree South Africans hope for and desperately need. Loadshedding has continued to accelerate in recent years, and the country has only had an uninterrupted electricity supply for around five weeks now, the longest period without loadshedding since 2022. The healthcare system also faces challenges, along with a concerningly high unemployment rate (32.1% as of 4Q23, with youth unemployment at a tragically high 59.4%). It is confronting a massive disease burden, while most school education quality is substandard. The legacy of corruption is undermining the state’s legitimacy and, tragically, impacting service delivery to voters, especially the most vulnerable.
In April 2024, the International Monetary Fund (IMF) said that SA has a GDP of US$373bn (R7trn-plus), making it the biggest economy in Africa (the IMF projects that SA will retain this position until 2027). According to the IMF, Nigeria’s GDP is estimated at US$253bn, behind Algeria (US$267bn) and Egypt (US$348bn). Still, despite being Africa’s biggest economy, SA cannot seem to rid itself of the deep-rooted structural inequalities holding back growth and development due to the rampant corruption that has plagued the country over the past 15 years or so. SA’s economic performance has been one of the weakest in sub-Saharan Africa (SSA), with the IMF lowering its 2024 forecast for real GDP growth to 0.9% (from 1.0% in January) in April. Moreover, the average SA consumer is becoming poorer – with the latest IMF data indicating that SA’s GDP per capita is now below the average for emerging economies – and at about the same level as in 2005. According to IMF data, SA’s GDP per capita dropped from US$6,680 in 2022 to US$6,190 in 2023 – far below the record-high of US$8,800 recorded in 2012. Additionally, the 2023 domestic GDP per capita is below the US$6,450 average for emerging markets (EMs). Notably, this is the same level of GDP per capita as in 2005. Simply put, SA’s expanding population growth, the weakness of the rand and the minimal economic growth means that the country’s population has been getting poorer in real terms. Moreover, in the domestic economy, material job creation has only occurred when GDP growth approaches 3% p.a. Thus, the economy is simply not growing at an adequate rate to sustainably boost long-term employment prospects for South Africans.
The bottom line
The IMF’s recent downgrade of SA’s 2024 growth outlook to 0.9% means, in context, that our growth rate is far below the EM average (4.2%), the global average (3.1%) and is lower than that of SSA (3.8%). According to the latest June data from RMB/BER, the Business Confidence Index (BCI) stood at 35% in 2Q24 – roughly just over one-third of the survey’s respondents were satisfied with prevailing business conditions. Simply put, meaningful job creation and sustainable economic growth can only come to fruition with a more favourable investment environment, not policy misalignment, governance uncertainty, and prevalent corruption. Collaboration between government, business, and labour is required to place the country on a renewed growth path – away from conflict and individual vested interests around growth that will, in turn, create jobs and a thriving economy where everyone benefits.
SA’s economy weathers a stormy start to the year
SA’s anaemic economy again finds itself in negative territory after narrowly dodging a recession by growing 0.3% QoQ in 4Q23 after shrinking in 3Q23. Surprising slightly on the downside, SA 1Q24 GDP print contracted by 0.1% QoQ. Weaker manufacturing, mining and construction drove much of the economy’s downward momentum on the production (supply) side, while the expenditure (demand) side witnessed a decline across all components. A stormy start to the year indeed. To better understand the intrinsic performance of the SA economy, it is important to break down the GDP print to a sectoral level. The agricultural sector notably rallied in 1Q24, expanding by 13.5% QoQ off the back of a buoyant horticulture sector. Unfortunately, it was insufficient to keep overall GDP growth in positive territory. Six of the ten industries on the production side of the economy performed poorly in the first quarter. Manufacturing was the largest negative contributor, declining by 1.4% QoQ and pulling GDP growth down by 0.2 of a percentage point. Mining output contracted by 2.3%, with platinum group metals (PGMs), coal, gold and manganese ore the largest drags on growth. Construction continued its downward trend, recording a fourth consecutive quarterly decline. The industry shrank by a further 3.1% in 1Q24, pulled lower by weaker economic activity related to residential buildings and construction works.
It is important to note that Stats SA also measures the expenditure side of GDP, which indicates the total demand in the economy. Government consumption, household consumption, investment (gross fixed capital formation [GFCF] and changes in inventories), exports and imports decreased in 1Q24. Exports fell by 2.3%, lowering GDP growth by 0.7 percentage points. This decline was primarily driven by weaker exports of precious stones and metals, vehicles and transport equipment (excluding aircraft), chemical products, base metals, and mineral products. However, there was a positive note with exports of vegetable products increasing in the first quarter, highlighting the agriculture sector’s strong performance.
Imports also decreased, mainly due to reduced trade in mineral products, vehicles and transport equipment (excluding aircraft), and vegetable products. GFCF, encompassing investments in infrastructure and other fixed assets, remained weak for a third consecutive quarter, dropping by 1.8% QoQ. Lower investments in machinery and equipment, residential buildings, and construction works drove this decline. Additionally, household final consumption expenditure decreased in 1Q24, with consumers cutting back on spending, especially on clothing and footwear, transport, miscellaneous goods and services, alcoholic beverages, tobacco and narcotics, and recreation and culture.
The bottom line
Overall, the SA economy’s gloomy start to 2024 compounds the concern around the longer-term economic trajectory for the country. Moreover, we anticipate that the near-term prospects for growth will remain lacklustre. Moving beyond 2023 and into 2024, we foresee that SA’s growth trajectory will persistently show weakness. Aside from the many structural problems present in the South African economy, the impact of elevated interest rates is expected to strain household disposable incomes, thereby restricting growth in consumer spending. Moreover, uncertainty around the eventual outcome (and success) of a GNU following the national election shake-up could further exacerbate investor uncertainty around key policy directions on the part of the government. Unfortunately, this mediocre economic performance will likely continue in 2Q24, as early high-level economic indicators have revealed that uncertainty in the lead-up to May’s election had diminished demand across various sectors, including manufacturing and retail. Overall, we track in line with the SARB’s GDP growth forecast for 2024 and 2025 at 1.2% and 1.3% YoY, respectively.
Steady as she goes – amid all the election noise, the SARB keeps a cool head and holds rates steady
With the inflation outlook remaining elevated, unsurprisingly, the SARB cautiously kept the repo rate on hold at 8.25% at its third MPC meeting this year, with the prime rate remaining at 11.75%. Crucially, the SARB now forecasts inflation stabilising at its 4.5% objective in 2Q25. The question is, why does this matter? While this is an improvement on its March forecast (which only reached the target at the end of 2025), average inflation for 2025 is only one-tenth of a percentage point lower. Subsequently, the SARB remains clear in its communication that the task of achieving its inflation objective has not yet been completed- and thus, it remains steadfast in its pursuit of this objective. Therefore, the average local consumer should not expect relief on their debt costs just yet.
Looking ahead, we expect inflation to remain subdued, albeit at levels higher than initially envisioned at the start of this year. Core inflation (particularly that of goods) will likely remain muted as consumer demand continues to be constrained by the pressures of elevated interest rates. Risks to the outlook appear more entrenched on the supply side – particularly regarding electricity, fuel, and other administered prices. Whilst food inflation has declined significantly over the past two months, the increasing costs of maize and wheat (coupled with the effects of a drier season in certain key production regions) could potentially stall this momentum. As a result, we continue to view food prices as a key upside risk to inflation, especially given the various ongoing supply shocks, particularly the El Niño weather pattern, which is currently wreaking havoc across the southern parts of Africa.
Given that the market has all but priced in the decision to hold, the key to the May MPC statement was the overall tone, which was closely watched by market participants across the board to better understand the conditions under which the SARB may consider easing monetary policy. Whilst SA had a more gradual acceleration in inflation than many peer countries (with a lower peak) since COVID-19, the return to the 4.5% midpoint of the SARB’s target band has been slow and remains at a distance. Although the MPC assesses the inflation forecast risks to be broadly balanced at present, the central bank maintains that high inflation expectations require it to deliver on its target sooner rather than later to re-anchor expectations. After three years of inflation being above 4.5%, unfortunately, few survey respondents, especially from businesses and trade unions, now believe that inflation will be at 4.5% in two years.
Regarding the growth outlook, overall, the latest round of economic activity indicators for 2Q24 have printed worse than expected, despite the low levels of loadshedding. This points to bigger, more entrenched structural issues being present in the domestic economy. Nonetheless, it is worth remembering that these higher-frequency data can be volatile. The SARB forecasts slightly better 2Q24 GDP growth, offsetting the weaker 1Q24 growth print. The central bank has maintained its previous GDP growth forecast of 1.2% YoY for 2024. The growth numbers for the outer years are also unchanged, improving to 1.6% YoY by 2026. These projections remain better than the 2023 outcome but are below longer-run averages of c. 2%.
The bottom line
Overall, at the current level of interest rates, the policy stance is considered restrictive, consistent with the inflation outlook and the need to address elevated inflation expectations. Thus, we maintain that the SARB’s MPC will not rush to cut the repo rate. Any possible interest rate cuts will likely only materialise towards the end of 2024 and depend on the inflation outlook (locally and abroad) and global interest rate developments as we progress further into this year. Current market sentiment suggests only one interest rate cut of 25 bps this year in SA, possibly two, with the second cut almost fully priced out per our expectations. Over the longer term, we expect the SARB to gradually cut rates from 8.25% to 7.5% through three 0.25% cuts, reflecting the theme of higher interest rates globally.
