There are clouds ahead, but there could be a silver lining

With the average household food basket surging to almost R5,000, economists are predicting more interest rate hikes to curb inflation.

South Africa is bracing for further economic turbulence amid fears of a global recession and low growth in 2023. This as continued blackouts hamper growth.

Rising inflation, worsened by the war in Ukraine that resulted in a spike in oil and food prices, was among major head winds in 2022, resulting in central banks tightening monetary policy.

Kristalina Georgieva, managing director of the International Monetary Fund, warned that a third of the global economy could be in recession this year, adding to low growth concerns. Chief economist and executive director at Efficient Group Dawie Roodt added to the tough-year chorus, saying it will be a difficult period for the global economy.

“The world economy will not do well. That will have a negative impact on the South African economy,” he said, adding that inflation is a major issue in South Africa.

“Inflation is a problem, but the worst is behind us. It means that though the SARB will increase interest rates, it will not increase them by too much,” Roodt added.

Prices of basic foods continue to increase, according to the latest household affordability index report by social justice group Pietermaritzburg Economic Justice and Dignity (PMBEJD).

If a recession occurs, it won’t necessarily mean investors will be unable to profit – they will just have to work that bit harder

—  Andrew Bahlmann, CEO, Deal Leaders International

It analysed food price data from 44 supermarkets and 30 butcheries in Johannesburg, Durban, Cape Town and Springbok in December, said the organisation’s Julie Smith.

The group found foods such as frozen chicken portions, onions, tomatoes, spinach, oranges, apples, tea and tinned pilchards increased by a staggering 4% that month. Other basics such as cake flour, sugar beans, samp, potatoes, full cream milk, beef, beef liver, chicken livers, bananas, coffee creamer and polony increased by 2%.

According to Smith, the average cost of the household food basket was R4,853.18 in December.

“[It] increased by R17.21 (0.4%), from R4,835.96 in November to R4,853.18 in December. The average cost of the household food basket increased by R577,24 (13,5%) from R4,275.94 in December 2021 to R4,853.18 in December 2022,” she said.

Statistics South Africa’s Consumer Price Index (CPI) for November 2022 shows headline inflation was 7,4% and 10,1%, 9,6% and 8,6% respectively for lowest-expenditure quintiles 1 to 3. CPI food inflation was 12,8%.

Smith said the cost of basic hygiene products is high. “These compete with food in the household purse.”

In draft resolutions emanating from the second leg of the ANC’s 55th national conference this week, the party said social grants and welfare payments should be protected from inflationary pressures. Without committing to a basic income grant, the ANC said provision should be made for “basic incomes” where fiscal space allows.

Annabel Bishop, chief economist at Investec, forecast South Africa’s GDP growth is likely to be 1.1% year on year in 2023, higher than the consensus of 0.4% quarter on quarter and seasonally adjusted at 1.6% year on year for the third quarter. “Last year will push GDP growth to above 2% year on year for 2022, but provide a high, suppressing base for 2023 growth to be calculated off.”

She said a key driver of inflation globally and domestically in 2023 will be the suppressing base effects from the year-on-year calculation, with prices rising sharply this year, but not likely to do so at the same pace next year. This will cause potentially lower than expected inflation.

Despite these challenges, some experts see a silver lining.

Carmen Nel, economist a Matrix Fund Managers, said China’s reopening will be positive for emerging market growth, particularly for South Africa. However, it could lift commodity prices which will dilute some base effects regarding disinflation. 

Nel said from an South African perspective, the SARB has been firmly focused on the exchange rate and inflation risks and expectations. “Ongoing hikes from the Fed will ensure the SARB keeps lifting the repo rate, albeit at a slower pace, in a bid to buttress the rand.”

“The rand has been a relative outperformer in the dying stages of 2022. The Phala Phala scandal introduced significant political uncertainty, which escalated in early December amid speculation that [President Cyril] Ramaphosa was set to resign, which subsequently proved incorrect.”

Andrew Bahlmann, CEO of Deal Leaders International, said while a majority of forecasts predicted tougher economic conditions in 2023, that doesn’t mean there will be no profits for investors in stock or mergers and acquisitions (M&A) markets.

“If a recession occurs, it won’t necessarily mean investors will be unable to profit — they will just have to work that bit harder to find them. There will still be opportunities, all be they fewer, that can be taken advantage of, as long as investors know where to look for them and seek the right advice.”

Regarding South Africa, Bahlmann said the rand remains weak and interest rates are expected to stay within a reasonable range despite recent hikes. “I expect investment markets to prosper in 2023 and the M&A market in particular to perform above expectations.”

However, the local market will assess whether elevated political uncertainty will be sustained after the ANC’s January 8 statement in Bloemfontein, which kicks off the political year.

Nel said as 2023 starts, developments regarding “Farmgate”, impeachment processes, resignations and recalls introduce South Africa-specific risks.

While her base case is that Ramaphosa will not be criminally charged, she said “there is always a chance, even if slim, that he is and, depending on this, there could be a vote of no confidence in 2023”.

Nel said while political uncertainty may be more muted than it was in the second half of December, it has not gone away. The market will be watching whether ongoing pressure regarding Phala Phala will distract Ramaphosa. “Is he in a position to implement reform in the economy or does he still need to address ANC conflict issues?”

Asief Mohamed, chief investment officer at Aeon Investment Management, expects 2023 to be a tale of two halves, with the impact of global interest rate increases by central banks having a dampening impact on consumer spending. 

“A weak consumer spending environment and poor consumer confidence environment will most likely result in lower profit margins and an earnings recession in the first half of this 12- to 18-month period.”

Mohamed expects equity markets to decline or stay relatively flat in the first half. “Once we see a steady decline in interest rates to the targets set by central banks, equity markets may start appreciating, but it is too early to make this call.”