Slow GDP recovery is on after escape from recession
Stronger economic growth adequate for a material improvement to the fiscal prognosis and jobs may seem out of reach after a week in which data releases showed exceedingly weak GDP and business confidence, while load-shedding surged again.
However, our analysis shows that South Africa could in the medium term attain around 3% growth if pervasive infrastructure constraints were resolved and business confidence recovered to the neutral 50 threshold from the depressed index level of 30 registered in the first quarter of 2024.
It is scant relief that the economy narrowly escaped a technical recession at the end of last year, posting a marginal 0.1% quarter-on-quarter expansion in the fourth quarter of 2023. Many metrics still testify to persistent weakness in the economy. Nearly half of the sectors contracted and actual economic activity was below prepandemic levels in six of the 10 economic sectors.
This weakness stems from headwinds ranging from soft commodity prices to slow and fragile global economic growth, to high interest rates and severe infrastructure constraints. The recent GDP data underscores the acute impact of electricity and logistics infrastructure constraints, with goods-producing sectors, the worst affected, continuing to underperform services. Since the end of 2019, before the onset of Covid-19, real GDP in the goods-producing sectors has shrunk 7.7%, compared to a 4.3% expansion in services.
The Treasury estimates the railway constraint reduced GDP in 2022 by 6% and the Reserve Bank estimates that the electricity shortfall reduced economic growth by 2% in 2023.
However, these two constraints are easing, with year-to-date load-shedding around half as much as the comparable period last year — a trend we expect to continue. This is supported by a surge in private sector generation capacity and higher electricity output from Eskom, and despite elevated levels of planned maintenance.
Stats SA’s data confirms a marginal increase in rail freight volumes recently, while anecdotal evidence points towards modest operational improvement at ports. The easing of these acute infrastructure constraints is a key driver of the growth acceleration we foresee this year, to around 1.2% from 0.6% in 2023. We expect a further improvement in 2025, to around 1.7%.
We expect some growth support from a forecast one percentage point reduction in consumer inflation and gradual interest rate relief (with a steady repo rate lowering from July by a cumulative percentage point).
The employment recovery in the second half of 2023 should provide some underpin to consumer spending. We therefore expect somewhat stronger growth in household consumption expenditure, despite a sizeable “bracket creep” effect (not adjusting income tax thresholds for inflation) in this year’s budget.
Since the pandemic, the macroeconomic environment has been most favourable to highmiddleto high-income groups, partly owing to unprecedented growth in investment income (particularly dividends). This boost, however, might be fading. Indeed, the macroeconomic backdrop should generally be more favourable for low-middle- to middle-income groups this year.
While higher-income groups’ employment remains quite resilient, the employment recovery in the second half of last year seems to mostly benefit middle-income earners. They will also be most sensitive to inflation and interest rate relief.
We expect real growth in fixed investment to continue — a key underpin to growing the productive capacity of the economy, which is essential to lift trend growth. The forecast risk is elevated, though. A protracted slump in business confidence is counteracting the support from ongoing, albeit slower, growth in company profits.
There should, however, be some support from further growth in public sector infrastructure spending, per the 2024 budget. Encouragingly, infrastructure budgets have been shielded from fiscal consolidation, and the underspending of many years seems to have reversed more recently.
Overall, while avoiding a recession in the fourth quarter last year and the prospective doubling of the annual growth rate in 2024 are encouraging milestones, more spirited growth is required to support meaningful improvement in fiscal debt and employment. Structural reforms, for some an old and boring refrain, remain critical.