As we march into the second half of 2024, the resilience of the SA economy is being tested by structural issues, enduring inflation, high interest rates and a confidence deficit. While the economic landscape shows signs of recovery, growth (or the lack thereof) and inflation remain critical challenges.
Persistent issues remain within state-owned enterprises (SOEs), including concerns about electricity supply and logistical bottlenecks at ports, which disrupted supply chains and heightened uncertainty ahead of the elections, worsening market volatility.
Economic growth remains tepid, with fourth-quarter GDP growth at a modest 0.1%, resulting in a meagre 0.6% growth for 2023. In the first three months of 2024, GDP shrank by 0.1%, largely due to load-shedding early in the first quarter and seasonal data issues in March.
Despite these hurdles there is room for optimism. Reduced load-shedding since late February and a well-received budget offer some hope. Easing inflation, lower interest rates and stabilising commodity prices should support SA over the remainder of the year.
Recent data, including the Reserve Bank’s leading indicator and purchasing managers’ indices, suggests an economic bottoming occurred during the last quarters of 2023 and the first quarter of 2024. A rebound is expected to be evident in second-quarter growth (once seasonal data issues are smoothed out) and a further gradual improvement is expected during the remainder of 2024 and into 2025. Overall growth prospects for 2024 are slightly improved; I expect growth of about 1.4%.
While the suspension of load-shedding has been encouraging, continuity during the coming winter is uncertain, even though private sector energy initiatives will help mitigate outages. Looking forward, the likelihood of load-shedding recedes every month. In a year or two we are unlikely to have any load-shedding, which will help improve the medium-term outlook.
The significantly stronger role of the private sector in the economy through energy generation and logistical support (as a strong start) will help lift medium-term growth to about 2.5% on a sustained basis. Slow policy reform and structural issues (the regulated labour market and skills deficit come to mind as some of the bigger ones) will prevent SA from attaining the 5%-6% sustained growth we need. However, 2.5% is more than double the recent (pre-Covid) growth performance and will start to make a difference.
Apart from less load-shedding and lower inflation and interest rates, and some improvement in growth, a sharp strengthening in the rand exchange rate later this year could help lift confidence
While headline inflation remains higher than the Reserve Bank is comfortable with, underlying inflationary pressures have eased markedly and there is no evidence of demand-driven inflation. Consumer goods inflation (the weighted average of clothing, footwear, furniture, appliances and vehicles) has eased sharply, from a recent peak of 5.5% in August to 4.9% by the end of 2023, 4.2% in March and 3.5% in April.
The Bank remains cautious and concerned about inflation expectations, yet questions arise over delaying rate cuts until September, risking a policy error. Do we need to drive consumer goods inflation below 3% (as in 2017-19) or into negative territory (like 2010-11) to counterbalance cost increases elsewhere? This is likely to push some sections of consumer spending into recessionary conditions. As a lagging indicator, inflation expectations will ease in line with inflation. We are now in rate-cutting territory and rates should come down soon.
Apart from less load-shedding and lower inflation and interest rates, and some improvement in growth, a sharp strengthening in the rand exchange rate later this year could help lift confidence. Currency dynamics show strong potential for the rand’s recovery — probably later in the year or early in 2025. While exchange rate forecasts are always fraught with risk, extreme levels make it easier to suggest a rebound.
There are many examples, but the Covid-19 lockdown is one of the best known. When the rand reached extreme weakness in April 2020. the easy forecast was that the rand would strengthen markedly. The not-so-easy part was when, and to what level. In the event the rand strengthened from R19/$ in late April 2020 to R13.50 by early June 2021. The rand is similarly undervalued now, even after some comeback in recent weeks.
The biggest driver of this expected strengthening is not necessarily improving SA conditions, but global conditions. The coming US rate-cutting cycle, combined with a risk-on trade as international investors chase higher returns in emerging economies, is likely to lead to a somewhat softer dollar over the remainder of the year and into 2025. The rand is significantly undervalued, according to my purchasing power parity valuation metrics, and is thus likely to rebound.
My model suggests the current fair value for the rand should be about R11.60/$. While I do not expect the currency to reach this level, historical trends show that when the rand is deeply undervalued it often rebounds strongly and overshoots on the strengthening leg as much as it overshot on the weakening leg. I foresee the rand strengthening significantly, possibly reaching R14 (or even R13 in the short term). While the major influence of such a strengthening comes from the dollar, it is also contingent on a stable post-election political environment and continued economic reform.
A stronger rand, coupled with less load-shedding, lower inflation and lower interest rates, will bolster confidence among consumers, businesses and investors, underpinning economic growth. Plans afoot for a lower inflation target (3% versus 4.5% now) — combined with better (albeit not great) medium-term growth, which would make it somewhat easier to get the fiscal situation under control — will likely mean a more stable rand exchange rate over the medium term.
For investors this means considering an overweight position in SA assets, balanced with global assets. With better growth prospects and a more stable rand, those spending and retiring in SA would benefit from this strategy as part of a balanced portfolio that takes into account the obvious need for diversification.
• Els is group chief economist at Old Mutual.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.