2023, a year of two halves. But what lies ahead?
This year has been characterised by elevated uncertainty and confounding economic outcomes. While we generally envisaged that the economy would slow from 1.9% last year to below 1% this year, outcomes have been unusually volatile, reflecting the post-pandemic forecasting complexity and the dynamic impact of domestic infrastructure inefficiencies such as electricity supply disruptions and logistical challenges. In particular, the first half of the year was exceptionally positive, with the first two quarters recording 0.4% and 0.5% quarterly expansion despite escalated load-shedding and cost-of-living pressures. Meanwhile, the start of the second half has been downbeat, with growth underwhelming expectations even as load-shedding intensity peaked in 2Q23. Below is a review of how the economy has generally performed this year and what lies ahead.
What does 3Q GDP mean?
The economy unexpectedly shrank by 0.2% q/q in 3Q23, receding from the 1H23 momentum. The volatile agricultural, forestry and fishing sector effectively dragged the economy, shrinking by 9.6% q/q and sharply by 19.9% y/y, as Western Cape flooding, logistics challenges and biosecurity issues weighed on output. In addition, the construction and trade, catering and accommodation sectors also entered into a technical recession, as cost-of-living pressures and a lack of infrastructure investment (bar energy-related investment) broadly constrained activity. The economy expanded by 0.3% in the first three quarters of this year compared to the same period last year. As such, the 3Q GDP data challenges our (as well as SARB and Treasury's) slightly above-consensus 0.8% growth forecast for 2023.
Nevertheless, while port and rail challenges continued to weigh on economic activity, the agricultural sector may rebound strongly in 4Q23. Furthermore, the sharp inventory destocking in 3Q could propel production ramp-up by the mining and manufacturing sectors in the last quarter. The 3.7% m/m expansion in electricity production at the start of 4Q23 and some improvement in the manufacturing PMI dataset are particularly encouraging. If sustained, the decline in energy-related imports should underpin near-term growth, but enduring growth will have to be supported by more broad-based investment. We maintain our 0.8% GDP growth for 2023 but are cognisant of the material downside risk.
Beyond 2023, growth gradually lifts
We see growth lifting to just above 1% next year, reaching 1.6% in 2025 and 1.8% in 2026, premised on reduced load-shedding, lower inflation, improving external demand, and the projected interest rate relief over the forecast horizon. As cost-of-living pressures ease, consumption spending growth should gradually lift from an estimated 1.1% this year to 1.4% by 2026. The approximately 2.5 million jobs created over the past eight quarters and a further one-year extension of the Social Relief of Distress (SRD) grant should also underpin spending. But the looming tax measures to raise additional revenue by R15 billion next year could limit spending growth.
While fixed investment is set to meet our 5.3% forecast this year, the recent broad-based quarterly relapse, after seven consecutive quarters of expansion, poses downside risk to the outlook, mainly if the first wave of energy-related investment cools further. Given the elevated uncertainty, depressed business confidence and a less supportive policy environment, the recovery in fixed investment since 1Q20 has generally not been broad-based.
Overall, we remain highly concerned about the impact of port and rail infrastructure inefficiencies which are likely to take longer to unwind. While the Treasury's recently announced financial support to Transnet should strengthen its balance sheet, the execution of Transnet's recovery plan and freight logistics roadmap will be critical to lift growth over the medium term.
Week in review
The FNB/BER Civil Confidence Index shed two index points to register 41 in 4Q23. Interestingly, however, there seems to be a disparity between sentiment and the underlying market conditions: sub-indices tracking activity, profitability and tender competition paint a more positive picture than what the overall sentiment suggests. This implies that confidence is being negatively affected by factors not directly related to current demand conditions. Instead, it is reflective of broader pessimism from other parts of the economy relating to load-shedding, logistical constraints, and the weakening fiscus. We also note that respondents remain concerned about the prevalence of criminal activity in the sector as well as the uncertainty created by the cancellation of tenders and delays in tender adjudication. Overall, the survey results suggest that demand for civil construction remained well supported in 4Q23 and the forward-looking indicators imply that this should continue to be the case over the near-term.
SA's gross foreign exchange reserves increased to $61.7 billion in November, from $61.0 billion in October. The increase reflected a higher dollar-denominated gold price as well as currency movements. Foreign exchange payments made on behalf of government mitigated the increase.
The FNB/BER Consumer Confidence Index (CCI) edged slightly lower to -17 index points in 4Q23, from -16 in 3Q23. Although consumer sentiment has improved compared to the very low levels recorded during 1H23, the latest reading is the lowest festive season reading in more than 20 years. This suggests that consumers, particularly in high- and mid-income segments, will be cautious during this holiday shopping season, which should worry retailers of non-essential goods. The slight deterioration in the CCI was driven by a relapse in the economic outlook sub-index, from -22 in 3Q23 to -28 in 4Q23. In contrast, the household financial outlook sub-index improved further, from -1 to +3, indicating that households are more concerned about the country's prospects rather than at the individual level. Nevertheless, most consumers continue to perceive that at present it is not appropriate to purchase big-ticket durable goods.
The current account deficit for 3Q23 narrowed to R19.3 billion from R185.2 billion (revised from R160.7 billion) in 2Q23. As a percentage of GDP, the current account deficit was 0.3% in 3Q23, compared to 2.7% (revised from 2.3%) previously. The narrowing of the current account deficit was supported by a lift in the trade surplus on goods, from 0.3% of GDP to 2.7%, as import values (volume effect) declined faster than export values (price effect). Meanwhile the services, income, and current transfers balance remained unchanged. Weaker terms of trade relative to last year as well as local infrastructure constraints, should continue to apply downward pressure to the trade balance, while initial indications of a slowing in energy-related imports through the 3Q23 GDP data could counter the pressure. Ultimately, expectations are for a wider current account deficit of around 1.5% this year, from 0.5% last year, and worsening over the forecast period.
Electricity production (not seasonally adjusted) expanded by 1.6% y/y in October, the first time after twenty-four months of consecutive decline. Seasonally adjusted electricity production increased by 3.7% m/m, more than reversing the 0.4% monthly decline in September, marking a good start to the fourth quarter. Electricity consumption also expanded by 1.0% y/y and 3.9% m/m, signalling that economic activity slightly improved at the start of 4Q23.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 5 Dec | SA | GDP s.a. % q/q | 3Q23 | -0.2 | 0.5 |
| SA | GDP % y/y | 3Q23 | -0.7 | 1.5 | |
| 6 Dec | SA | FNB/BER Civil Confidence Index | 4Q23 | 41.0 | 43.0 |
| 7 Dec | SA | Gross foreign exchange reserves $ billion | Nov | 61.7 | 61.0 |
| SA | FNB/BER Consumer Confidence Index | 4Q23 | -17.0 | -16.0 | |
| SA | Current account balance R billion | 3Q23 | -19.3 | -185.2 | |
| SA | Electricity production % y/y | Oct | 1.6 | -1.0 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,787.04 | -1.0% | 4.5% | 1.0% |
| USD/ZAR | 18.77 | -0.5% | 2.3% | 9.3% |
| EUR/ZAR | 20.25 | -1.4% | 3.2% | 12.3% |
| GBP/ZAR | 23.63 | -0.7% | 4.8% | 12.8% |
| Platinum US$/oz | 909.82 | -2.1% | 1.7% | -9.6% |
| Gold US$/oz | 2,028.47 | -0.4% | 3.0% | 13.6% |
| Brent US$/oz | 74.05 | -10.6% | -9.3% | -4.0% |
| SA 10 year bond yield | 9.97 | 0.0% | -4.0% | -5.0% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.8 | 1.2 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.1 | 1.3 | 1.3 | 1.4 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.3 | 3.2 | 4.4 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 5.9 | 5.2 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.2 | 4.7 | 4.9 | 4.6 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.10 | 17.50 | 18.40 |
