Dark clouds gather over South Africa’s economic recovery

South Africa’s economy looks set to bounce back in the second half of the year following negative growth in the first quarter. 

Economic data from the manufacturing and mining sectors point to a recovery, and the whole economic Purchasing Managers’ Index (PMI) has broken into positive territory. 

This suggests that economic growth will pick up in the second half of the year, with improved consumer spending helping to accelerate activity. 

However, business and consumer confidence remain poor, indicating that the growth prospects may be short-lived and unsustainable in the long run. 

Thus, if reforms accelerate, growth could pick up to over 2% in the medium term, but it is very unlikely to cross 5%. 

This is feedback from Old Mutual chief economist Johann Els, who outlined the country’s economic prospects for the second half of the year at the insurer’s mid-year macroeconomic update. 

The increased optimism in South Africa’s economy following the formation of the Government of National Unity (GNU) and improvements in electricity supply have not translated into economic data. 

South Africa’s economic growth remains flat, with ratings agencies, banks, and asset managers revising their outlooks for the country’s economy downwards. 

This has largely been due to disappointing output from the country’s mining and manufacturing sectors, with construction continuing its years-long decline. 

These sectors are vital for employment and foreign exchange earnings through exports, with their declining output having a significant impact on economic activity. 

Els expects the output of these sectors to pick up in the second half of the year, with the data for April and May looking strong for the mining and manufacturing sectors. 

The manufacturing PMI has also shown a significant uptick in new sales orders and, crucially, expected business conditions. 

This suggests that the sector is beginning to expand and anticipates a future that will surpass the past. 

The expected improvement in performance from the manufacturing and mining sectors has also pushed the three-month average for the whole economy PMI into positive territory, indicating a pickup in activity and growth. 

This can be seen in the graphs below, courtesy of Els and Old Mutual. 

Crisis of confidence 

A major fly in the ointment of South Africa’s economic recovery is the country’s ongoing confidence crisis, which inhibits investment. 

Els explained that confidence in a country’s economic and political climate is vital for investment to occur and drive economic growth. 

In South Africa, confidence has been poor since 2010, when Jacob Zuma ascended to the Presidency and the government began ratcheting up its spending without much improvement in economic growth. 

The lack of confidence is primarily a function of policy uncertainty, inadequate implementation, and a failure to adjust policies that have not improved economic outcomes. 

When concern about politics and policy was at its lowest level in the 2000s, South Africa experienced a relative economic boom. 

The country’s economy grew by over 3% per annum throughout this period, peaking at over 5% just before the Great Financial Crisis and Jacob Zuma’s ascension to the presidency. 

Since then, concern in the country’s political environment has steadily risen, resulting in declining investment and economic growth. 

Els explained that South Africa’s economy could have grown at well above 2% per annum over the past decade if confidence levels had matched those in the 2000s. 

Instead, the country’s economy has averaged an annual growth rate of less than 1% for the past decade and only 1.1% for the past 15 years.

While consumer confidence has held up more robustly over the past decade, it too has come under immense pressure in the past few years. 

With rising inflation and interest rates after the pandemic, the cost of living skyrocketed, limiting consumer spending and saving. 

Although this picture has improved due to lower inflation and interest rates, consumer confidence remains in negative territory. 

This can be seen in the graphs below.