South Africa on the rise

South Africa is poised for a period of economic growth and financial relief thanks to a combination of factors, including pension withdrawals, interest rate cuts, and easing inflation.

This is according to Investec chief economist Annabel Bishop, who said the outlook for South African consumers has improved.

Part of this is introducing the two-pot retirement system on 1 September, which has seen a surge in applications for pension fund withdrawals, totalling just over R4 billion so far. The initial wave of withdrawals is expected to reach R40 billion by the end of 2024.

Bishop said this is providing a much-needed boost to household consumption expenditure (HCE) and supporting economic growth.

She explained that HCE growth in the fourth quarter of 2024 will be positive for the economist, as it adds to consumer income and taxation but is also likely to be used to reduce debt.

While the immediate impact on GDP growth will be relatively modest, the long-term effects are more promising. 

She said the continued release of pension savings over the next few years, combined with interest rate cuts and declining inflation, is expected to drive GDP growth to between 1.5% and 2.0% annually.

A significant portion of the withdrawn pension funds is also likely to be used to reduce debt, providing relief to households struggling with high debt-to-income ratios. 

This will improve financial stability and mitigate the potential inflationary impact of increased spending.

The country’s declining inflation rate is another key factor contributing to Bishop’s positive outlook. 

The latest inflation print showed CPI at 4.6% for July, the lowest inflation has been since 2021. 

This marked the sixth consecutive month that inflation has moderated and the fourteenth consecutive month that CPI has been within the Reserve Bank’s target range of 3% to 6%.

Bishop said the falling inflation rate has already contributed to a rise in real incomes, and further declines are expected in the coming months.

This, coupled with the interest rate-cutting cycle that is expected to come soon, will provide much-needed relief to consumers facing rising living costs.

Many believe the moderation in inflation and expected interest rate cuts in Europe and the US will prompt the South African Reserve Bank (SARB) to cut interest rates at its next meeting.

The SARB’s Monetary Policy Committee (MPC) has been in a hiking cycle since November 2021.

The committee has implemented 475 basis points of hikes, bringing the repo rate to a 15-year high of 8.25% and the prime lending rate to 11.75%.

This has placed significant pressure on South African consumers, particularly those with home and car loans.

According to DebtBusters, the latest complete quarter, Q2.24, showed a 12% jump in consumers seeking debt management, and debt counselling inquiries rose 18%.

The organisation found that the median debt-to-annual income ratio of 105% is still elevated, and the full impact of successive interest rate increases since November 2021 continues to be felt in consumer finances.

It said consumers need to spend around 62% of their take-home pay to service their debt before coming to debt counselling. Those taking home R35,000 or more per month need to use 68% of their income towards debt repayments.

Luckily, many experts have predicted that the SARB will cut rates at its upcoming September meeting, which will provide much-needed relief for households.

Bishop said 2025 will benefit from the interest rate cutting cycle underway over the course of next year and from the two- to three-quarter lagged effects of interest rate cuts, beginning in September this year. 

In addition, she said the government’s efforts to address structural challenges, such as load-shedding and the freight and logistics crisis, are expected to further support economic growth. 

While progress may be slow, the resolution of these issues will create a more conducive environment for businesses to thrive.

Overall, Bishop said the outlook for South Africa’s economy appears to be brightening. With a combination of factors supporting growth and financial stability, the country is well-positioned to weather the challenges ahead and experience a period of prosperity.