South Africa Seen Dodging Recession on Consumer-Led Rebound
South Africa’s economy probably avoided tipping into a recession in the second quarter, handing the country’s new coalition government a much-needed base to build on over the rest of the year.
Softer-than-expected inflation last month buoyed hopes for interest-rate cuts that will be welcomed by consumers, who have endured high borrowing costs for years, while delivering the latest in a string of modestly upbeat readings on Africa’s most-industrialized economy.
“We forecast consecutive 25 basis point rate cuts at the next three Monetary Policy Committee meetings followed by cuts at a 25 basis-point per quarter pace down to a 6.5% terminal rate,” Goldman Sachs Economist Andrew Matheny wrote in a client note after annual inflation slowed to 4.6% in July, the lowest rate in three years.
The central bank, which delivers its next policy decision on Sept. 19, has held rates at a 15-year high of 8.25% since July 2023.
The data follows stronger manufacturing, retail and wholesale-trade sales readings showing parts of the economy have turned positive that were a drag in the first quarter, when output shrank 0.1%.
Amid clear improvements in electricity supplies after years of frequent power cuts, analysts polled by Bloomberg see a 0.5% gain when second quarter gross domestic product data is published Sept. 3, adding to evidence the country has turned a corner since elections on May 29.
“South Africans opened their wallets a little wider in June amid tentative optimism about the post-election economic outlook,” Oxford Economics analysts said on Monday, after data last week showed June retail sales rose 4.1% year-on-year.
Investors have taken note. The rand has rallied around 5% against the dollar following the election, tuning into the mood as well as higher gold prices and hopes for lower US interest rates.
Business confidence has also improved since post-vote negotiations yielded a broad governing coalition that joined centrist parties with the African National Congress, which lost its parliamentary majority for the first time since coming to power 30 years ago.
That doused fears that the ANC would ally itself with leftist rivals including former President Jacob Zuma’s uMkhonto weSizwe Party and the Economic Freedom Fighters.
“With load shedding suspended, economic data improved in the second quarter,” analysts at Investec wrote in a note on Tuesday, using the local name for power cuts. “The data indicates a change in direction for gross domestic product from a contraction in the first quarter to an expansion.”
The self-styled government of national unity says it will accelerate reforms and investment, supporting growth and job creation in a country blighted by an unemployment rate of more than 33%.
South Africans are cautiously taking the GNU — as it’s locally known — at its word, while waiting for evidence it can deliver.
“There is now an opportunity to put the economy on an upward trajectory that fosters greater business and investor confidence,” the South African Chamber of Commerce said in an Aug. 14 statement.
To be sure, South Africa’s economy still faces headwinds. It’s only forecast to expand a meager 1% in 2024, before picking up to 1.7% next year. But that would still be an achievement after averaging barely 1% for the past decade.
Household spending subtracted 0.2 percentage points from output in the first quarter, so increased consumption that turned a headwind into a tailwind would be helpful.
“We’re moving in the right direction,” said Elna Moolman, Standard Bank Group Ltd.’s head of South Africa macroeconomic research. “From a consumer perspective, we think that the outlook for the retail sales in the second half of the year is even stronger.”
South African manufacturing is another piece of the puzzle that points toward a rebound, growing 0.9% in the second quarter, compared with a 1.4% decline in the previous three months. Wholesale trade sales also rose 0.9% over the period. But mining shrank by 0.9%, after declining by 2.3% in the first three months.
Jee-A van der Linde, senior economist at Oxford Economics, said that the poor mining result would probably offset the positive momentum delivered by a significant improvement in power supply.
Eskom Performing
State-owned utility Eskom Holdings SOC Ltd. hasn’t imposed scheduled power cuts since late March after many months when they were an almost daily occurrence.
“Our base case is for real GDP to expand by 0.8% in 2024, and with economic growth forecast to reach 1.6% next year due to improved post-election growth prospects,” said Van der Linde.
Eskom’s shortcomings and logistical snarl-ups at the nation’s ports and railways have handicapped the South African economy for years.
Hope that Eskom can keep the lights on and that freight-rail operations improve at troubled state transport firm Transnet SOC Ltd. is another reason for cautious optimism for the second half of the year and 2025.
“We think that we have a bit more confidence now that the election is behind us,” Moolman said. “We’ve seen positive signals. There’s more and more in the reform process” that communicates to investors that “it’s worth making the investment.”
