Private sector keeping South African economy alive

The bulk of fixed investment in South Africa is made by the private sector, a trend that is expected to persist with the new government’s promised support.

Newly appointed Public Works and Infrastructure Minister Dean Macpherson recently said he would like to transform South Africa into a “massive construction site”. 

Macpherson said new “funding models” would be introduced to encourage the private sector to invest in government infrastructure projects.

He also suggested to the National Treasury that longer-term financing be made available specifically for infrastructure so that allocated funding did not simply get reallocated with every change in the budget, as often happens with allocated infrastructure spending.

The latest statistics show the private sector in South Africa made 71% of all fixed investments in Q1 2024, with government and state-owned enterprises (SOEs) accounting for only 17.8% and 11.0%, respectively. 

Investec chief economist Annabel Bishop said the private sector continues to generate the most capital (fixed) investment in the country.

It persistently accounts for the bulk of new investment in machinery and other equipment, including transport equipment and residential buildings.

However, growth in fixed investment spending contracted by 1.8% quarter on quarter in Q1 2024 ahead of the election, as private business sector confidence was depressed, falling further in the quarter. 

In particular, the Reserve Bank reports a 3.3% contraction in private business enterprises’ gross fixed capital formation (GDCF) or fixed investment in the first quarter of this year, as sentiment sank ahead of the country’s national election.

June’s Bloomberg consensus for 2024’s economic growth eased to 1.0% y/y from 1.1% y/y in May, with growth around 1.0% y/y.

Bishop said this is a weak growth rate that is insufficient to substantially reduce unemployment and stimulate business confidence. 

“Business confidence is based both on the current profitability of operations and the outlook,” she explained. 

“Uncertainty also prevailed around the election period, both on the outcome of the election and then the form of government that would emerge after the election.”

The Government of National Unity (GNU), formed from eleven parties with over 70% of the vote in the national election, has bolstered confidence. The ANC highlighted that this ensures broad representation and a strong mandate to govern. 

The latest July Bloomberg survey saw the outlook for 2025 lift from 1.5% y/y to 1.6% y/y, as optimism rose cautiously. 

However, with over half the year completed and a contraction in the first quarter, the forecast for 2024 remained at 1.0%.

“So far, Bloomberg’s economic consensus has not notably changed on the outlook, with economic growth in 2026 still at 1.9% y/y and 2025 only at 1.6% y/y. A wait-and-see approach has prevailed,” Bishop said.

The SARB has said that the real gross fixed capital formation level in the first quarter of 2024 was 2.8% lower than in the corresponding period of 2023, reflecting continued weak business confidence amid a challenging operating environment.

“This also demonstrates the level of concern in investor sentiment leading up to South Africa’s national elections, with the Q2 2024 fixed investment readings also likely to show some further indication of caution,” she said.

However, sentiment will have room to improve in the second half of the year on the peaceful, successful transition to a new government, which can now see centrist governance and avoid a shift to the left, which had worried investors, particularly on property rights.

The ANC has provided consistent messaging, stating the GNU will focus on promoting inclusive and sustainable economic growth, job creation, infrastructure development, social justice, effective governance, and national security.

The government has also said it would focus on building state capacity, enhancing education and healthcare, and fostering social cohesion and democratic participation. 

With the ANC’s policies seen as consistent, the largest party in the GNU is not expected to drive a rapid acceleration in economic growth but rather a modest acceleration to 3.0% y/y by 2029. However, uncertainty has been greatly reduced.

The ANC has also said that it “will protect the unity of the government, ensuring our collaborative efforts within the GNU yield positive outcomes for all South Africans. Our government is gearing up to serve the Republic.”

Overall, “fixed investment growth is now expected to strengthen materially over the medium term as electricity and logistic capacity rises, which will aid economic growth, and so business sentiment, as would more pro-business economic policies”, Bishop said.