No respite on the horizon for SA economy in first half of 2024

You can also listen to this podcast on iono.fm here.

Download the free LiSTN audio app on Google Play, Apple or here.

Interview starts at the 8:34 mark

JEREMY MAGGS: After a stronger than expected first half of the year, economic activity measured in the BankservAfrica Economic Transactions Index (Beti) levelled off in the final months of 2023. The November index reading reflected another disappointing month, moderating to the same level as a year ago.

More on that now from economist, Elize Kruger. Elize, given the readings and the contraction in real GDP in Q3, how likely is it then that we’re heading towards a technical recession,

ELIZE KRUGER: Jeremy, it’s not impossible that we might see a second quarterly decline. The Beti index is indeed signalling that the economy is under pressure, and we’ve had now five consecutive monthly drops in the Beti index and over time, the Beti has had a good correlation with GDP growth.

However, a sector like the agricultural sector could perhaps bounce back. So it’s not a definitive indication, but it definitely signals that the cumulative impact of many challenges are now at its harshest in the economy, and that could very well result in a further quarter of contraction.

JEREMY MAGGS: How do you interpret then the stark contrast in economic activity between the first and the second halves of this year?

ELIZE KRUGER: Ja, that is indeed perhaps a difficult question to answer, but I would say we had a surprise in both economic growth and in the Beti in the first half. I think that was just maybe a factor that we’ve not quite seen the cumulative impact hurting the economy as bad in the first half than in the second half.

Thinking about interest rates, we are now 125 basis points above the level a year ago. So that extra pressure on household budgets now built up towards the second half of this year. You recall that we reached that upper level in the mid-year period.

Similarly, we’ve not seen a notable drop really in our inflation rate, so we still have high cost of living, especially on things like food prices. So the pain is out there and I think we’ve reached a level where it’s now more punitive in the economy than in the first half.

JEREMY MAGGS: And none of this, of course, Elize, has been helped by the spate of load shedding.

ELIZE KRUGER: Absolutely. That remains perhaps the number one factor that has kept the economy back this year. But one should look at it a bit broader, it’s also in the last month or two, our logistical crisis that’s been getting worse. We’ve also seen our job market remaining fairly lacklustre and our wage increases not keeping up with inflation. So all of those factors in combination now result in this fairly dismal economic stance where we currently are.

JEREMY MAGGS: Elize, you’ve spoken about the signs of stress among households reaching punitive levels at this point, as you put it. How do you think this is going to shape consumer behaviour in the near term as we then head into Q1 2024?

ELIZE KRUGER: Yes, I expect more of the same in terms of the pressure on household budgets, at least for Q1 next year. Looking forward into 2024, hopefully we should start to see cuts in our interest rate in the second quarter, very much perhaps in line with what the US Fed might also do.

Read: SA consumers battling to pay their home loans and credit cards

We should start to see our inflation rate also moderating a bit more towards the second half of next year. So that should help households on balance from the middle of next year. But I think the first half will remain more of the same in what we have been experiencing, it will remain a difficult economic environment.

JEREMY MAGGS: But there will be factory pressure next year as well. If you look at the PMI (Purchasing Managers’ Index) that’s remained below 50 for several months now. It says a lot about the current state, and I guess the future outlook for next year of the manufacturing sector.

ELIZE KRUGER: Yes, indeed, the manufacturing sector has been under pressure actually for a couple of years, if you really look at it a bit longer term. So, yes, they are obviously energy intensive in terms of their usage of power and so on. So although we’ve seen some resilience, meaning we could have expected even worse levels if you look at the load shedding in 2023. So sectors have started to adjust to that, looking at mitigating measures that have been put in place and so on.

Read: SA mining, manufacturing exceed forecasts in October

But still, it’s a muddle-along scenario on manufacturing and globally we’ve not been helped by the global economy, which also had a difficult year. So yes, I can’t see much upside in manufacturing into next year. I think that sector will remain one where there’s a lot of pressure.

JEREMY MAGGS: So, short term then, as far as next year is concerned, are you foreseeing any immediate policy measures or interventions that could mitigate the challenges that you’ve outlined?

ELIZE KRUGER: Not really in the short term, Jeremy. I think we’ve seen on power generation and now also on the logistical sector that the private sector has been invited and started to come to the party to help make a difference. But these are more medium-term developments, it’s not going to sort out South Africa’s near-term problems like in quarter one next year.

Read:
SA aims to fire up economic growth with port, rail revival
Eskom asks government to take stake in company to ease debt payments

But hopefully in the medium term, talking more 2025 and onwards, we should start to see the positive impact of more private sector involvement in the economy, especially on the power generation side.

We’ve started to see a huge pipeline of projects that are now being built, that capacity should come online in the next 12, 18 months and should start to make a difference. But it’s not a near term, it’s more a medium-term expectation.

JEREMY MAGGS: Elize Kruger, thank you very much for joining us.