South African economic outlook

The South African economy remains under pressure going into 2024, mainly due to supply-side constraints in the electricity and logistics sectors. Real GDP growth for 2023 is expected to fall below the National Treasury’s forecast of 0.8%. The economy only posted 0.3% year-on-year growth over the first three quarters, including a decrease of 0.2% year-on-year in the third quarter of 2023. Outlooks for 2024 and beyond have also moderated and are dependent on the (historically slow) speed of structural reforms, largely to address record levels of load shedding experienced during 2023.

Real GDP growth is forecast at 1% in 2024 and, on average, only 1.4% between 2024 and 2026. This does not compare well with the International Monetary Fund’s 4% projection for emerging and developing economies, and even falls below the outlook for advanced economies of 1.7%.

After being a strong performer earlier in the year, the agriculture sector decreased by 9.6% year-on-year in the third quarter of 2023. Furthermore, manufacturing, construction, mining, and trade industries also contracted — of those, manufacturing and mining have faced more challenging circumstances due to ongoing electricity shortages, weaker freight and logistics capacity, and — in the case of mining — lower commodity prices. Manufacturing and mining are among the six industries (besides electricity, construction, trade, and transport) that by the end of the second quarter of 2023 were still trending below their 2019 levels of gross value added (based on average quarterly gross value added).

The statistics on the expenditure side are no better. Household final consumption expenditure decreased by 0.3% year-on year in the third quarter. Households continue to struggle financially given high-interest rates, elevated inflation — particularly food- and fuel-related — the impacts of load shedding on the cost of living, lower real disposable incomes, and higher debt.
While South Africa’s headline inflation moderated to 5% year-on-year in the third quarter of 2023 — from a peak of 7.6% year-on-year in the third quarter of the previous year — this trend reversed going into the fourth quarter, averaging 5.5% y-o-y. Still, the final reading of 2023 came in at 5.1% y-o-y in December, marking the second lowest reading of the year. The South African Reserve Bank (SARB) noted in its Monetary Policy Committee (MPC) meeting in January 2024 that although headline inflationary pressures at a global scale appear to be moderating, core inflation remains sticky. The MPC would like to see South African inflation trend further towards the midpoint of its targeting band of 3%-6% and subsequently made the unanimous decision to keep the policy rate unchanged at 8.25%, noting that risks to the upside remain for the inflation outlook.

From a fiscal perspective, South Africa’s public finances (both current and outlook) weakened in 2023. An increase in the budget deficit to 4.9% of GDP was projected in November 2023 — up from the 4% estimate in the February 2023 budget. This means gross debt is expected to rise to 77.7% of GDP in the 2025/26 fiscal year. Maintaining a fiscal policy stance that stabilises debt is one of the key action items tabled by the National Treasury to unlock much-needed growth and, in turn, address many social and developmental woes the country faces. Another key required action includes a focus on improving the efficiency of public spending.

One of the most significant focus areas in the medium term will need to be investment in infrastructure to stimulate economic growth.
This will require the government to enhance infrastructure delivery by upping both quantity and quality. It needs to crowd in more private sector financing for larger projects, review the public-private partnership framework, and establish an agency to support finance and implementation of infrastructure.
The need for continued progress on structural economic reforms, specifically in the electricity and logistics sectors, is now more urgent than ever.

The economic costs of failure and inefficiency in these sectors have mounted over the past year, partly due to lack of investment but also due to mismanagement, corruption, and even theft. Reforms in the electricity sector – including lower restrictions on self-generation and reforms to encourage private investment – are expected to add over 11GW of renewable sources to help curb the power crisis in the medium term. With the electricity supply crisis continually weighing on economic growth, it is critical that these reforms continue to be implemented to curb power cuts, unlock investment and get the economy back on course.

The already gloomy picture could get worse if the pace of reforms remains sluggish. Real GDP growth averaged about 1.4% per year between 2010 and 2022 – a rate well below the target set in the 2030 National Development Plan that was released in 2011. To make a dent in unemployment, create jobs, and to reduce poverty and inequality, South Africa needs a faster pace of growth; but slow reforms will mean sluggish to no growth in the foreseeable future. With limited space for accommodative policy on both the monetary and fiscal fronts, it is imperative that reforms are implemented timeously and effectively if the South African economy is to have a chance at recovery.