South African economy in trouble

South Africa’s economy faces significant headwinds, with consumers under severe pressure from elevated inflation and interest rates. This will result in muted economic growth for the remainder of the year and potentially a recession. 

StatsSA recently revealed that South Africa’s gross domestic product (GDP) increased by 0.6% in the second quarter of 2023. 

This is higher compared to the first quarter growth of 0.4%, which followed the shock GDP decline of 1.3% in the fourth quarter of 2022 amid record load-shedding levels.

However, economists are concerned that this growth is unsustainable as the main driver of South Africa’s economy is consumer spending, which turned negative in the second quarter. 

PwC South Africa chief economist Lullu Krugel said that the local economy is consumer-driven, leading to a negative economic growth outlook. 

“South Africa has a consumer-driven economy, with nearly 64% of the country’s GDP attributed to private final consumption in 2022,” Krugel explained. 

“As such, the power of the financial consumer wallet is critical to the economy’s strength.”

Thus, with household spending declining by 0.3% in the second quarter, it is likely that the economy will not grow for the rest of the year. 

Krugel also noted that the FNB/BER Consumer Confidence Index (CCI) declined from -23 in the first quarter of this year to -25 in 2023Q2.

The CCI reading “indicates tremendous concern among consumers about South Africa’s economic prospects and household finances.”

The survey showed that “the vast majority of consumers expect a deterioration in South Africa’s economic growth over the next 12 months and consider the present time as highly inappropriate to purchase durable goods”.

Stanlib chief economist Kevin Lings echoed Krugel’s comments, saying that negative household consumption indicates that consumers are under tremendous pressure from high inflation and interest rates. 

“That element of the economy, I think, is very worrying. I am not convinced that South Africa’s economic growth is sustainable,” Lings told Business Day TV. 

Negative household spending also indicates that the economy is not gaining any momentum with regard to growth. 

“I would not get too excited about the improvement. It is still modest growth overall and likely to dissipate.”

Efficient Group chief economist Dawie Roodt also raised concerns about the South African economy, saying, “It is certainly possible that the economy could dip into a recession in the third and fourth quarters of the year.”

South African consumers are still under severe pressure despite the country’s marginal growth, indicating that the economy may contract in 2023, said Roodt. 

Household consumption declined by 0.3% in the second quarter. “It is very clear that despite a slight uptick in economic activity, households are still under tremendous pressure.” 

The negative impact of declining household spending will be compounded by the elevated levels of load-shedding the country is currently experiencing. 

In particular, this will hit the manufacturing sector hard in the third quarter if load-shedding remains elevated. However, the industry has proven itself to be more resilient than expected.