Economic outlook offers upside and downside

Anyone looking to December’s data releases for pointers on the outlook for SA’s economy in 2024 might have been simultaneously upbeat and downbeat. On the downside, the economic growth rate in 2023 could come in worse than expected earlier last year. On the upside, 2024 can only be better – even if the economy will still be weak and subject to big uncertainties, global and local.

After a stronger-than-expected first half of 2023, the numbers showed the economy weakened again in the second half. December was a litany of woe. Stats SA reported the economy contracted in the third quarter. The S&P Global purchasing managers’ index showed output during the month fell at the fastest pace since May because of gridlock at the ports.

We will have to wait until March for fourth-quarter official growth data, but signs are that the economy may have contracted again, which would make it a technical recession. That could only be negative for already weak business and consumer confidence levels. It could well mean that growth for the year could come in closer to 0.5% than the Reserve Bank’s most recent 0.8% forecast or the latest Reuters consensus of 0.7%.

Whether the precise decimal points matter in the scheme of things is a question, given that any of these numbers is far below the population growth rate and even further below the growth needed to tackle SA’s unemployment and fiscal crises. Happily, 2024 should be better. SA is one of a few economies globally whose growth rate is forecast to pick this year, albeit to a still weak 1.2%-1.3%.

SA has done a better job of bringing down inflation than many emerging market and advanced economies. The interest rate cycle will turn in 2024, boosting consumer spending, confidence and growth.

When the first interest rate cuts will be depends on what the US Federal Reserve does and what impact that has on the rand exchange rate, as much as it does on domestic inflation dynamics. The Reserve Bank may be even more cautious than usual before a general election whose outcome can affect investor confidence and the rand in the shorter term and impact economic policy in the longer term.

The Bank will be cautious too in the face of a fiscal position that is not sustainable and can become even less so if the election yields an unstable and populist coalition. Though the government has committed to stabilising public debt and pencilled in a path of spending cuts that could achieve that in the medium term, few believe it will have the political support to make the cuts required. High levels of public debt can be expected to continue to weigh on SA’s credit rating, its exchange rate and its cost of borrowing. In essence, it will be difficult for the Bank to loosen monetary policy that far if fiscal policy remains too loose.

All those risks will weigh on the Bank’s space to cut interest rates and on the economic outlook itself. Yet the economy could still be stronger than in 2023, and there will be opportunities to offset the risks.

Load-shedding will still be with us, but the private sector has been investing at speed in industrial-scale renewable energy generation and in rooftop solar. That has already helped to mitigate the full impact of Eskom’s disastrous operational performance on the economy. The omens are good that the pace of investment in new generation will increase.

There is hope too that new leadership at Eskom will help to improve its performance. Likewise at Transnet. Operational improvements are certainly desperately needed at Transnet, with port and rail constraints now as much of a deadweight on the economy as electricity shortages. More fundamental reforms are urgently needed too in ports and rail, as well as in energy, to unlock more private sector investment and more efficiency.

But investment, particularly private sector investment, was one of 2023’s bright spots in an economy that was sluggish at best. Fixed investment spending reversed its declining trend, to show steady growth in recent quarters. Investec projects it will grow 4.6% in 2024 and 4.8% in 2025. That bodes well for the economy’s growth rate and job creation. It is a reminder too of how important private sector confidence and investment is in supporting growth and living standards. As SA heads into election mode, politicians would do well to remember that.

SA’S GROWTH RATE IS FORECAST TO PICK THIS YEAR, ALBEIT TO A STILL WEAK 1.2%-1.3%