Headwinds vs tailwinds
WEAK ECONOMY: FACTORS LIKE LOAD SHEDDING, LOGISTICS BOTTLENECKS MAJOR OBSTACLES SA is no longer the powerhouse producer it used to be, even in commodities like gold.
South Africa’s economy posted negligible growth in the final quarter of last year. The only bit of good news is that 0.1% real quarterly growth means that a technical recession – two consecutive negative quarters – was avoided.
This is not a hugely important distinction, but it might have dealt yet another blow to sentiment.
The bad news is that growth for 2023 as a whole was only 0.6%. The underlying growth in the domestic economy has, therefore, been weak, no matter how you look at it. Why?
Shed happens
By now, everyone knows that load shedding is a major obstacle to economic growth, and last year was a record year for power cuts.
The recent budget noted that more than 16 000 gigawatt hours of power were shed last year, twice as much as in 2022, which in turn was four times as much as in 2021.
A modern economy needs a reliable electricity supply, period.
However, modern economies are also flexible and adaptable, and we’ve seen a degree of resilience in the case of SA.
After all, growth was positive, even if only barely so, and economic activity did not reverse.
Load shedding by stages
Logistics bottlenecks also intensified during the past year, with both railway and port volumes under severe pressure. Again, a modern economy needs an efficient means of transporting goods, and SA is severely lacking.
Businesses can move goods by road, but this is much more expensive. Sending goods overseas by plane rather than ship is even more expensive and completely unfeasible for low-value bulk items like coal and iron ore.
For example, Kumba Iron Ore recently announced that it would lower production over the medium term, resulting in 490 job losses. The reason is simply that it cannot get enough iron ore from its mines to the ports on Transnet’s struggling trains and needs to cut output to match the limited rail capacity.
The common factor in both the electricity and logistics crises is, of course, two underperforming state-owned monopolies.
Years of bad policymaking led us to this point.
Cost-of-living squeeze
Another major headwind last year was the cost-of-living squeeze on consumers. The repo rate hit the highest level in 15 years, while consumer inflation averaged 6%. This ate into the disposable incomes of households, weighing on consumer spending.
Indeed, SA faces the unusual but uncomfortable combination of weak growth and high interest rates. A weak economy will normally exert downward pressure on policy and market-based interest rates (bond yields). For instance, China’s 10-year bond yield hit a record low of 2.3% last week.
While the Chinese government has announced a 5% growth target for this year, the bond market is not buying it; instead, it signals years of sluggish growth and low inflation ahead.
But in SA, sub-par economic growth means government tax revenues disappoint, leading to higher levels of borrowing.
As the market worries about the South African government’s creditworthiness, it charges a higher interest rate. This higher interest rate, in turn, lifts borrowing costs for the private sector, further depressing growth. This is a vicious cycle that must be broken, and the recent budget has taken steps to achieve it.
Commodities
Finally, commodity price moves haven’t helped. In particular, the dollar palladium price has fallen 30% over the past year, while coal is down 20%. Platinum and iron ore are roughly 10% lower. It helps that the gold price is near record levels at $2 178 per ounce, but SA is no longer the powerhouse producer it once was.
Meanwhile, the price of oil, the country’s main export, has traded between $72 and $96 per barrel over the past 12 months.
The current $82 per barrel level is uncomfortably high for South African motorists, who’ve just seen retail fuel prices jump.
Can these headwinds turn into tailwinds?
Tails, you win.
Inflation has already started declining and will likely be lower on average this year. This means consumers’ income can grow in real terms this year. The economy’s wage bill grew by 6.7% year on year in the fourth quarter. If this pace is maintained and inflation declines, real income growth can support a higher rate of real spending growth.
Lower inflation also implies lower interest rates. However, the South African Reserve Bank is likely to remain cautious.
Expectations for rate cuts internationally, particularly in the US, have been scaled back recently and will influence the Monetary Policy Committee’s thinking.
The committee will also be mindful of the rand’s ongoing weakness and nervously eye the recent jump in maize prices. This suggests modest rate cuts.