Slow GDP recovery under way after narrow escape from recession

Stronger economic growth adequate to materially improve the fiscal prognosis and employment may seem out of reach after a week in which data releases showed exceedingly weak GDP and business confidence, while load-shedding surged again.

However, our analysis shows that South Africa could in the medium term attain around 3% growth if pervasive infrastructure constraints were resolved and business confidence recovered to the neutral 50 threshold from the depressed index level of 30 registered in the first quarter of 2024.

It is scant relief that the economy narrowly escaped a technical recession at the end of last year, posting a marginal 0.1% quarter-on-quarter expansion in the fourth quarter of 2023. Despite the relief of not crossing this technical pain threshold, many metrics are nevertheless evidence of the persistent weakness in the economy. Nearly half of the sectors contracted and actual economic activity was below pre-pandemic levels in six of the 10 economic sectors.

This weakness stems from several headwinds, ranging from soft commodity prices to slow and fragile global economic growth, to high interest rates and severe infrastructure constraints. The recent GDP data underscores the acute impact of electricity and logistics infrastructure constraints, with goods-producing sectors — which tend to incur the worst direct impact of entrenched infrastructure shortfalls — continuing to underperform the services sectors. Since the end of 2019, before the onset of the Covid pandemic and lockdown in 2020, real GDP in the goods-producing sectors has shrunk by 7.7%, compared to a 4.3% expansion in the services sectors.

Treasury estimates that the railway constraint reduced GDP in 2022 by 6% (when the direct and indirect impacts are taken into account, relative to railway infrastructure operating at full capacity). And the Reserve Bank estimates that the electricity shortfall reduced economic growth by 2% in 2023.

However, these two constraints are easing, with year-to-date load-shedding around half as much as the comparable period last year — a trend we expect to continue this year. This is supported by a surge in private sector generation capacity and higher electricity output from Eskom, and notwithstanding elevated levels of planned maintenance to the existing electricity generation fleet.

Stats SA’s data confirms a marginal increase in rail freight volumes recently, while anecdotal evidence also points towards modest operational improvement at ports. The easing of these acute infrastructure constraints is a key driver of the growth acceleration that we foresee this year, to around 1.2% from 0.6% in 2023. We expect a further improvement in 2025, to around 1.7%.

We also expect some growth support this year from a forecast one percentage point reduction in consumer inflation as well as gradual interest rate relief (with a steady lowering of the repo rate by a cumulative percentage point from the July monetary policy committee meeting).

There should, however, be some support from further growth in public sector infrastructure spending, per the recent 2024 national budget.

The employment recovery recorded in the second half of 2023 should also provide some underpin to consumer spending this year. We therefore expect somewhat stronger growth in household consumption expenditure, notwithstanding a sizeable impact from “bracket creep” (not adjusting income tax thresholds for inflation) in this year’s budget.

Since the pandemic, the macroeconomic environment has generally been most favourable for high-middle to high-income groups, partly owing to unprecedented growth in their income from investments (particularly sturdy growth in their income from dividends). This boost, however, might be fading. Indeed, the macroeconomic backdrop should at the margin generally be more favourable for low-middle to middle income groups this year.

While higher-income groups’ employment remains quite resilient, the employment recovery in the second half of last year seems to mostly benefit middle-income earners. They will also be most sensitive to the expected inflation and interest rate relief.

We expect ongoing real growth in fixed investment — a key underpin to growing the productive capacity of the economy, which is essential to lift trend growth. The forecast risk here is elevated, though. A protracted slump in business confidence is counteracting the support from ongoing, albeit slower, growth in company profits.

There should, however, be some support from further growth in public sector infrastructure spending, per the recent 2024 national budget. Encouragingly, infrastructure budgets have been shielded from the fiscal consolidation initiatives, and the underspending that has prevailed for many years seems to have reversed more recently.

Overall, while avoiding a recession in the fourth quarter of last year and the prospective doubling of the annual growth rate in 2024 are encouraging milestones, more spirited growth is required to support meaningful improvement in fiscal debt and employment. Structural reforms, a term that some may find an old and boring refrain, are critical to get us out of our low growth trap.

• Moolman is head of South African macroeconomic research at Standard Bank Group