The SA Reserve Bank’s six-month indicator measuring economic performance surprised at the start of the third quarter, suggesting recession fears are fading even as the country continues to face acute power shortages and inefficient logistics networks.
Bank data released on Tuesday shows economic activity grew 0.1% month on month in July after an upwardly revised 0.2% uptick the previous month, marking the second consecutive month of improvements in the business indicators after four straight months of declines.
The increase in the composite leading business cycle indicator was driven by six of the 10 available component time series, which outweighed decreases in the remaining four.
The indicator, which offers a projection of SA’s economic growth cycle for the next six to 12 month, is good news for finance minister Enoch Godongwana, who is due to table the medium-term budget policy statement on November 1.
The positive movement in the indicator is also in line with recent upward GDP revisions by the Reserve Bank, together with the latest Thomson Reuters consensus whose economic growth forecasts were increased from 0.4% to 0.7% for 2023, citing continued spending by households, public corporations and the government.
The Bank added that more upside support is expected to stem from relatively robust corporate investment, and lifted its gross fixed capital formation forecast to a much higher 7.7% from 4.4% for 2023.
“The upward revision to economic growth from 0.4% to 0.7% for 2023 implies that recession fears are fading and the push for lower rates on account of growth is also fading,” RMB chief economist Isaah Mhlanga said. “The economy has been resilient despite more intense load-shedding, thanks to the private sector and households investing in own energy generation and adapting to load-shedding.”
Investec chief economist Annabel Bishop said the lessening in negativity on an annual basis, and the positive contribution of components outweighing those that are negative in SA’s leading indicator, points to a brightening in economic growth in SA in 2024, at least for the first month of that year.
Bishop said less load-shedding in the second quarter lifted SA’s GDP growth outcome above expectations, which will also push up the GDP growth out-turn for the year to around 0.5% year on year, if not slightly above, instead of the earlier expected 0.2%.
“However, risks remain for 2023 as repairs and maintenance at power stations avoided in the second quarter to reduce load-shedding are expected to take place in the second half of this year,” she said.
A breakdown of the data shows the largest positive contributors were an acceleration in the six months that smoothed the growth rate of job advertisement space and an increase in the average hours worked per factory worker in the manufacturing sector.
The main factors dragging down the indicator were a decrease in SA’s export commodity price index (denominated in US dollars) and a slowdown in the six-month smoothed growth rate of the number of new passenger vehicles sold.
Bishop said the cyclical downturn in commodity prices is expected to lift from as early as next year and at least a 10-year bull run is being mooted on infrastructure build and new technologies to mitigate the effects of climate change. With SA being the world’s largest producer of manganese, this will benefit its exports.
“The rollout of SA’s renewable energy programme will also boost economic growth and state finances as revenue increases, with an interest-rate cut cycle expected from next year, albeit a shallow one,” she said.
The gauge is calculated by using building plans approved, new passenger vehicles sold, the commodity price index for main export commodities, an index of prices of all classes of shares traded on the JSE, job advertisements, the volume of orders in manufacturing, real money supply (comprising currency, demand deposits and other liquid deposits such as savings deposits), average hours worked per factory worker in manufacturing, and the interest-rate spread.
Also included are the composite leading business cycle indicators of SA’s major trading-partner countries, the business confidence index, and gross operating surplus as a percentage of GDP.
Update: September 29, 2023. This article has been updated with new information.
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