South Africa

The GNU’s big advantage

The constraints that have held South Africa’s economic growth back over recent years are easing, providing a stronger foundation for the Government of National Unity (GNU) to accelerate reforms.

This is according to FNB economists in the latest Economics Weekly, centring around South Africa’s economic prospects in 2024 and beyond.

The economists said South Africa is turning a corner. The economy is set to experience a modest recovery following lacklustre post-pandemic growth of 0.7% in 2023. 

They explained that this slow growth largely reflected the severe impact of record levels of electricity load-shedding and the cost-of-living crisis, severely negatively impacting South African consumers.

The South African Reserve Bank (SARB) estimated that load-shedding reduced GDP growth by 1.5 percentage points in 2023. 

However, as load-shedding has eased and gone away entirely for most of 2024, the drag is expected to be minimal this year, at just 0.13 percentage points.

The economists said load-shedding is expected to have no further impact for 2025 and 2026.

Aside from load-shedding relief, South Africans have also recently benefited from lower inflation and slightly lower interest rates in recent months.

South Africa’s CPI has cooled from a high of 7.8% in July 2022 to 4.4% in the latest print for August 2024.

Easing inflation has also led to a slight relief from interest rates after South Africa had been in a hiking cycle since November 2021.

The repo rate has been at a 15-year high of 8.25% since May last year, and the prime lending rate at 11.75%.

This has put consumers under significant pressure and added to the country’s high cost of living.

However, at its latest meeting in September, the Monetary Policy Committee opted to cut rates for the first time in years.

While the cut was only 25 basis points, compared to the US Federal Reserve’s 50 basis points cut in the same month, it has provided some relief for struggling consumers.

Lesetja Kganyago
SARB Governor Lesetja Kganyago

“Easing energy constraints, along with slowing inflation, interest rate cuts, and optimism surrounding the GNU, supports a modest economic recovery,” the FNB economists said. 

However, they said growth could accelerate even further if pro-growth reforms are implemented in a timely manner.

“Economic growth in the first half of 2024 has been sluggish, averaging just 0.2% q/q, as high interest rates, nominal wages lagging inflation, and election-related uncertainty weighed on sentiment and economic activity,” they said. 

“Weak domestic and external demand, along with drought and biosecurity challenges, also hindered productive sectors.” 

However, they said many of these challenges have now subsided, paving the way for a modest recovery.

The economists expect the impact of these factors subsidising to become more evident in 2025 onward.

Therefore, FNB expects economic growth to increase by around 2% next year. 

While data from the first half of 2024 suggest that GDP growth will likely average 1.0% for the year, a projected increase towards 2% in 2025 is supported by less restrictive monetary policy and an anticipated rise in real wage income as inflation moderates. 

“This improved environment provides a stronger foundation for the GNU to advance and accelerate reforms to boost business confidence and fixed investment,” they said.

Fixed investment is currently in recession but could rebound as confidence and economic conditions improve. 

In the second quarter of 2024, fixed investment declined by 1.4%. This makes it the fourth consecutive quarterly contraction, driven by private business investment losing momentum and reversing its prolonged recovery toward pre-pandemic levels. 

Year-to-date, fixed investment is down 5.0%, reflecting broad-based weakness across all asset types. 

Fixed investment in South Africa experienced two years of solid growth in 2022 and 2023, largely driven by the initial wave of renewable energy investments.

However, the weakness seen in the past four quarters suggests that fixed investment will drag GDP growth in 2024 before contributing positively again from 2025 onward.

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