By: Mamello Matikinca-Ngwenya, Chief Economist.
1. The global economy
The most recent forecasts for the global economy show consensus for a moderate deceleration in GDP growth this year before lifting to around 3.0% over the medium term but remaining below trend. Advanced economies are expected to soften further as tailwinds in the United States (US) and Japan weaken, but emerging market growth, particularly in India, should be supported at 4.0% (flat from the 2023 projection). With piecemeal policy support in China, growth will likely remain constrained by the property sector malaise and weak consumer confidence, thereby limiting support for industrial commodity prices. In general, we remain concerned that further escalations in geopolitical tensions will hinder improvement in global trade, the reversion of inflation to central bank targets, and fiscal policy rebalancing.
2. Domestic economic growth: Short-term challenges, long-term optimism
Following a slowdown to 1.9% in 2022 and an estimated 0.6% in 2023 from the robust post-pandemic rebound of 4.7% y/y in 2021, economic growth is poised to encounter further challenges over the near to medium term. Infrastructure hurdles, spanning energy, roads, ports, and rail, coupled with tight monetary policy, are expected to adversely impact supply-demand dynamics. Our forecasts indicate economic growth of 1.2% this year, gradually lifting to 1.6% and 1.8% in 2025 and 2026, respectively. This equates to an average annual growth rate of 1.5% between 2024 and 2026, falling below the estimated 1.8% population growth rate, suggesting a continued decline in the standard of living. Concrete economic reforms and public-private partnerships are deemed critical for fostering improved economic outcomes. The upcoming general elections bear significance, carrying potential implications for the broader macroeconomic framework.
Curran, E. & Crawford, A., 2023. In Curran, E. & Crawford, A., 2023. In 2024, It is Election Year in 40 countries. Bloomberg newsletter, 1 November.
Household consumption: Despite these challenges, we anticipate economic growth to find support in household consumption expenditure. Consumers should benefit from lower inflation, employment gains, the extension of the Social Relief of Distress (SRD) grant, and a contemplated, albeit modest, interest rate cutting cycle. Consumer spending on restaurants and hotels has remained robust at 23.8% year-to-date (YTD, as of 3Q23), followed by clothing and footwear (6.2% YTD). This trend should persist, though at a slower pace, as the post-pandemic pent-up demand fades. We project the impact of elevated price inflation on various goods and services to diminish, as past interest rate increases work through supply-demand dynamics, contributing to a reduction in inflation. In the near term, spending on discretionary and interest-rate-sensitive items, such as vehicles and household equipment, may experience subdued growth as some consumers defer purchases until inflation subsides further, interest rates decrease, and confidence improves.
Fixed investment: Total fixed investment has surged by 5.1% YTD, outpacing the 4.7% growth recorded over the corresponding period in 2022. This growth is driven by machinery and equipment, including transport equipment, and a rebound in construction works and non-residential buildings. Despite the prevailing business confidence deficiencies, the upward trajectory in fixed investment is expected to be sustained, underpinned by energy-related investments, water infrastructure rollout, and policy interventions aimed at improving port and rail operational performance. However, the deteriorating fiscal climate poses a risk, potentially curtailing general government capital expenditure.
External trade: Exports of goods and services have generally underperformed imports since March 2011, reflecting reduced production and export competitiveness. The forecast assumes this trend continues until the execution of Transnet's recovery plan and the freight logistic roadmap is complete or at an advanced stage. Growth in exports is expected to average 1.7%, while imports are envisaged to average around 3.0%, consistent with expected improvement in domestic demand. This results in a current account deficit over the forecast horizon, which we forecast to deteriorate towards 2.9% of GDP.
Sectorial growth overview: Expectations for sectorial growth are mixed, but generally depict subdued growth, particularly in the near term. Export-oriented sectors may face challenges due to reduced competitiveness and weak external demand, while internal trade and private services sectors (i.e., finance, real estate and business services, transport, storage and communication and personal services) could benefit from a recovery in household demand.
Primary sector: The primary sector's contribution to GDP growth is expected to be negligible, with the mining sector constrained by infrastructure bottlenecks, weak external demand, and lower commodity prices. The volatile agricultural sector also faces challenges, including higher input costs, biosecurity issues, and adverse weather patterns as climate change advances.
Secondary sector: Manufacturing production growth may remain lacklustre in the near term due to weak domestic and external demand and infrastructure challenges. However, manufacturers are expected to ramp up production beyond the near term as demand conditions and infrastructure capacity improves. The electricity, gas, and water sector may face continued weakness, but the peak in load-shedding intensity and private sector embedded electricity generation should support growth. The construction sector has indicated some improvement, supported by increased activity in residential and non-residential buildings, as well as general construction works. Policy measures within the energy, water, ports, and rail network industries are also expected to support construction activity over the medium term.
Tertiary sector: The private tertiary sector is expected to continue driving overall growth over the forecast horizon. Internal trade and private services sectors should be supported by alleviated cost-of-living pressures as inflation gradually falls and nominal interest rates decrease. However, weak export earnings and looming tax measures, potentially in the form of fiscal drag, may impose constraints on household demand for goods and services.
3. Macroeconomic policy
Slower inflation is a key feature of the longer-term outlook. However, the risk that it is more sticky than projected is material in the medium term. Currency and supply-side pressures have continued to manifest themselves in elevated goods inflation, while services highlight weak consumer demand and constrained passthrough of elevated input costs. In line with this, core inflation should remain contained. This supports average annual headline inflation slowing from around 6.0% in 2023, to 5.2% in 2024, before falling to 4.7% in 2026 and 4.5% by 2030.
Weak demand-driven inflation is consistent with restrictive monetary policy. With nominal interest rates at 8.25%, and inflation falling towards 5% this year, real interest rates should climb above 3.0% and exceed the South African Reserve Bank's (SARB's) estimated level of neutral of 2.7%. As policy becomes more restrictive with inflation slowing faster than neutral rises, and after four consecutive holds by the Monetary Policy Committee (MPC), we are more confident that the next move in nominal interest rates is down. While we anticipate the first cut in 2H24, the exact timing is subject to event risks such as the elections and stickier inflation, which could temper expectations for rate cuts. Ultimately, the SARB MPC will probably only look to remove excess restrictiveness but not necessarily shift to an accommodative stance. This will be key to catering for funding risks and ensuring that financial conditions and inflation expectations are consistent with long-term objectives. Unfortunately, elevated short-term interest rates have a bearing on government borrowing costs, and with fiscal slippage already portrayed in the 2023 Medium-Term Budget Policy Statement (MTBPS), persistent social wage and State-owned enterprise (SOE) spending pressures only stand to compound near-term deterioration. This highlights the need to insulate the reform agenda, as recently portrayed in the logistics roadmap and appointment of the board for the electricity transmission company - essential to unlocking potential growth, revenues and improve sovereign ratings.
4. Property market update
Following above-trend transaction activity between 2H20 and 2022, demand for residential property is expected to have reached its lowest point in 2023. Available data suggests that volumes have declined by 27% to date (up to 3Q23), with the fall more pronounced in higher-priced segments. By contrast, activity in lower-priced segments benefited from the downscaling effect as buyers sought more affordable alternatives. Furthermore, the subdued economic activity and high interest rates have disproportionately impacted younger individuals (>35 years), predominantly first-time buyers, while stronger balance sheets softened the blow on older buyers. Commensurately, house price growth is plateauing across the spectrum, although there are noticeable variations across location and property values. Lower priced segments continue to outperform, reflecting the buying-down effect indicated above and the persistent supply deficiencies. Meanwhile the semi-gration trend, wherein affluent individuals sell inland property and buy in coastal towns, has supported demand and property values in higher priced segments, particularly in regions along the Western Cape coast.
We project home buying activity to stall in the near term but pick up steadily over the forecast horizon. We expect annual mortgage volumes this year to remain broadly unchanged from 2023, at approximately 10% below pre-pandemic levels (five-year average, 2015 to 2019). The gradual decline in inflation and borrowing costs, combined with employment gains, should modestly stimulate demand in the interest-rate sensitive segments over the medium term, which could see volumes mean-revert by 2025. In the longer term, volumes should stabilise modestly above pre-pandemic levels, supported by improved sentiment; employment and income gains; lower interest rates; faster population growth as well as innovation and widening access to credit markets. While we expect price growth to have reached its trough in 4Q23, the weak house price growth trajectory should continue for a little while, until inflation and borrowing costs ease more meaningfully in late 2024. In the longer term, price growth could settle around 7.5%, supported by improved GDP growth, and a combination of stronger demand for housing and improved structural affordability, following the persistent real house price correction since the GFC.
