South Africa risks technical recession because of SARB’s high interest rates

FNB economists have warned that if the South African Reserve Bank (SARB) continues to keep interest rates as high as they are beyond when it is necessary, South Africa could face a technical recession.

In their latest Economic Weekly, FNB economists said South African consumers are under increasing pressure due to the SARB’s high interest rates.

The SARB’s Monetary Policy Committee (MPC) has hiked interest rates by a cumulative 475 basis points since the start of the current hiking cycle.

After easing interest rates during the Covid-19 pandemic to provide relief for households, the MPC started raising rates in November 2021 when faced with rising inflation.

Since then, the SARB has raised the repo rate to 8.25% and the prime lending rate to 11.75%. 

However, despite the high interest rates, inflation has also remained persistent, recently rising to 5.6% in February. It averaged 5.9% in 2023. This surpasses wage income growth of 5.6% in the same year. 

“Consequently, demand, particularly that associated with interest rate-sensitive spending, has weakened and reflects a strained consumer,” the economists said. 

They explained that this is in contrast to the trajectory of the US financial conditions index.

The US index suggests that, despite the US Federal Reserve also having a tightened monetary policy, the country’s broader financial conditions remain relatively accommodative to consumers.

“This, coupled with resilient growth in the US, may be why the Fed is delaying interest rate cuts,” they explained.

However, South Africa’s economy is grappling with a far more severe environment, with low economic growth and consumers bearing the brunt of the tight financial conditions. 

This can be seen in household consumption expenditure, which crawled at 0.7% last year, a significant drop from 2.5% in 2022.

The economists said this reflected a mild technical recession between the second and third quarters of 2023. 

“Our assessment of the restrictive broader financial conditions underscores a continued decline in inflation-adjusted credit growth,” they said. 

“Moreover, we note a weaker currency, a sharp dip in the inflation-adjusted JSE All Share index, and a sustained fall in real residential property price growth.”

They said that while inflation may have peaked, it is still not fully under control, and upside risks remain. Therefore, the Reserve Bank must be careful not to cut interest rates too soon.

However, they also warned that prolonging rate cuts beyond when high rates are necessary could further stifle growth and heighten the likelihood of a technical recession.

This is particularly the case when broader financial conditions in South Africa are already restrictive.

They said the US Fed rate has a big impact on financial conditions across the world.

However, the situation in the US differs significantly from South Africa’s when viewed from broader financial conditions and consumer perspectives.

“This underscores the need for the MPC to consider initiating rate cuts,” they said. “Our long-standing view is that rate cuts are likely to materialise at the beginning of the second half of this year, although the fiscal environment and inflation risks present a risk of further delays.”

Below is an overview of the contrast between the financial conditions in South Africa versus the US, despite both having high interest rates, sourced from the FNB Economic Weekly.