South Africa’s outlook sours

As the global outlook darkens, things turn more sour for South Africa’s economy, says BNP Paribas chief economist for Middle East and Africa, Jeff Schultz.

The finance group has revised its economic growth outlook for South Africa lower to 1.7% for 2022 while making a massive cut to estimates for 2023 – dropping 0.6 percentage points to 0.2%.

In a note on Wednesday (9 September), Schultz said that with the United States and Europe set to face a recession in 2023 and China facing its own growth challenges as it attempts to tweak its zero-Covid policy, the outlook for South African growth and activity “does not look good”.

“A developed market recession matters for South Africa: Our emerging market team’s analysis of sensitivities to growth slowdowns by key region indicate that South Africa’s own growth and activity is particularly well correlated with the US, showing a 1.3 percentage point (pp) impact on domestic growth from every 1pp change in US growth,” he said.

In addition, increasingly tenuous structural growth problems – such as electricity supply from domestic electricity production waning to recent recessionary levels – have led the finance group to cut its already well-below-consensus GDP growth forecast even further.

According to Schultz, the downgrade to the 2022 GDP estimate is based on the belief that the second half of the year will have been negatively affected by even worse load-shedding than the group’s already bearish estimates assumed.

This view has been exacerbated by the temporary force majeure at key ports from industrial action early in the quarter.

“Our productivity points to an economy whose short-term growth potential currently stands at a meagre 0.2%, recovering only marginally from the Covid-19 growth hit. This is likely to complicate policymaking into 2023,” he said.

BNP Paribas has taken a bearish view of the South African economy, saying that it believes that high levels of inflation are going to be sticking around for longer than many other economists and analysts have projected.

“We have argued extensively that we expect inflation to prove stickier than most expect in 2023, thanks to higher wage settlements, inventory restocking and weaker productivity. We maintain these views and forecast headline CPI inflation to moderate to an above-consensus 5.8% in 2023 from an estimated 6.8% in 2022,” it said.

Overall, the group only sees inflation heading slowly back towards the Reserve Bank’s 4.5% midpoint target from late 2024 – months later than more bullish projections of an early-to-mid 2024 return to the target range.

“This tees up a challenging period of stagflation for the South African economy in 2023, we argue,” it said.

As a result of this rather bleak outlook, the finance group said that South Africans should not expect the Reserve Bank to pivot from its rate hike cycle any time soon.

“Stagflationary conditions are less than ideal for the SARB, but don’t expect the central bank to blink in its pursuit of price stability,” it said.

The group forecasts at least another 75bp hike on 24 November – without ruling out the possibility of a 100bp hike – followed by a final 50bp hike in January to a terminal 7.50%.

“We see a risk of more rather than fewer hikes in 2023, and we think this will largely depend on the rand’s behaviour, which at the moment we think seems to be at the mercy of souring global economic conditions,” the group said.

Read: Things fall apart at Eskom