By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano.
The January 2024 World Economic Outlook by the International Monetary Fund (IMF) reflects a resilient global economic recovery despite the severe impact of the pandemic, geopolitical tensions, and cost-of-living pressures. The IMF expects global growth to remain at 3.1% this year, unchanged from the estimated growth for 2023, while a modest increase to 3.2% is expected in 2025. However, these growth projections remain below the pre-pandemic (2000-2019) average of 3.8%, underscoring restrictive monetary policies, the withdrawal of fiscal support, and trade-related disruptions. Global trade of goods and services is also expected to expand rather slowly, projected at 3.3% for 2024, lifting to 3.5% in 2025. Given this global backdrop, we briefly outline our macroeconomic projections for the local economy.
Short-term challenges, but cautiously optimistic over the medium term
Following a slowdown to 1.9% in 2022 and our estimated 0.6% (previously 0.8%) in 2023 from the robust post-pandemic rebound of 4.7% y/y in 2021, economic growth is poised to encounter further challenges over the near- to - medium term. Infrastructure hurdles, spanning energy, roads, ports, and rail, coupled with tight monetary policy, are expected to impact supply-demand dynamics adversely. Our forecasts indicate economic growth of 1.2% this year, gradually lifting to 1.6% and 1.8% in 2025 and 2026, respectively. This equates to an average annual growth rate of 1.5% between 2024 and 2026, falling below the estimated 1.8% population growth rate, suggesting a continued decline in the standard of living.
Some consumer relief as inflation eases further and rate cuts come into view
We anticipate that economic growth will be supported by household consumption expenditure as consumers benefit from moderating inflation, employment gains, the extension of the Social Relief of Distress (SRD) grant, and a contemplated, albeit modest, interest rate cutting cycle (see table overleaf). We project real consumption expenditure to increase from an estimated 0.8% in 2023 to 1.5% this year, 1.8% in 2025 and 2026. However, near-term spending on discretionary and interest-rate- sensitive items, such as vehicles and household equipment, may experience subdued growth as some consumers defer purchases until inflation subsides further, interest rates decrease, and confidence improves. Although we do not anticipate tax increases in the upcoming February 2024 Budget in the form of Value-Added Tax (VAT) and Personal Income Tax (PIT), given the already elevated tax burdens, a possible fiscal drag may have implications for consumer spending, putting pressure on our forecast.
Fixed investment: a sustained but protracted recovery:
Fixed investment faced a significant setback during the pandemic, experiencing a 14.6% decline in 2020. As of 2022, the level of fixed investment was 10.0% below 2019 levels and 16.0% below the 2015 peak of R796 billion. Due to depressed business confidence, a slow pace of growth-enhancing reforms, and generally unfavourable domestic business conditions, fixed investment remains well below the 2030 target of 30% of GDP envisaged by the National Development Plan. In 2022, fixed investment accounted for 14.5% of GDP, compared to the pre-pandemic (2000-19) average of 16.6%. Despite the ongoing challenges, we anticipate the protracted recovery in fixed investment to persist, with a complete recovery expected in 2025. This projection is based on fixed investment growth of 3.7% this year (from an estimated 5.0% in 2023), followed by 4.5% and 3.9% in 2025 and 2026, respectively. Energy and transport logistics reforms alongside modernisation, underpin these positive trends. However, the deteriorating fiscal climate poses risks to the fixed investment outlook, given its implications for general government capital infrastructure expenditure.
Steady recovery in the residential property market
In the residential property market, demand likely bottomed in 2023, following above-trend transaction activity between 2H20 and 2022. We project home-buying activity to move sideways in the near term, at levels 10% below pre-pandemic average (between 2015 and 2019), but to pick up steadily over the forecast horizon. The gradual decline in inflation and borrowing costs, combined with employment gains, should modestly stimulate demand in the interest-rate sensitive segments over the medium term, which could see volumes mean-revert by 2025. In the longer term, volumes should stabilise modestly above pre-pandemic levels, supported by improved sentiment; employment and income gains; lower interest rates; faster population growth, as well as innovation and widening access to credit markets. We expect volumes to grow by 0.8% this year, before lifting by 12.7% in 2025.
From a valuations' perspective, we expect price appreciation to have reached its trough in 4Q23. However, the subdued house price growth trajectory should persist for a little while, until the lagged impact of lower inflation and borrowing costs filter through, from late 2024 to early 2025. In the longer term, price growth will be supported by improved GDP growth, and a combination of stronger demand for housing and improved structural affordability, following the persistent real house price correction since the Global Financial Crisis. We expect the FNB House Price Index (HPI) to average 1.4% this year, relatively unchanged from the 1.5% in 2023, before lifting to 3.0% in 2025.
Week in review
Private Sector Credit Extension (PSCE) outperformed market expectations and accelerated to 4.9% y/y in December, from 3.8% in November, on the back of faster growth in corporate credit which outweighed the slower household credit uptake. Corporate credit quickened to 5.0% from 3.1% previously, with all sub-components improving in December, spearheaded by instalment sales (predominantly VAF, 16.9% from 16.8%). Notably, mortgage extension, while still relatively low compared to recent history, accelerated to 3.9% from 3.2% in November, for the first time since the most recent peak of 6.3% in February 2023. This gives credence to the view that the commercial real estate market is likely at the bottom of the cycle. Overall, corporate credit slowed to 7.5% in 2023, from 8.9% in 2022, in line with higher borrowing costs and slower economic activity.
From a household perspective, the slowing credit extension trend persisted, registering 4.3% from 4.8% previously, largely due to the continued moderation in unsecured credit uptake. Nevertheless, demand and utilisation of credit cards remains robust, growing by 9.3% y/y in December, in contrast to a 4.1% decline in overdrafts. Within asset-backed credit, slowing uptake of mortgages continued at 3.3% y/y, down from 4.0% in November, in line with slower buying activity and declining loan sizes as buyers seek cheaper options. Nevertheless, market indicators suggest that activity may have reached the bottom in 4Q23. By contrast, instalment sales credit remains steady at a robust 7.0%. The relative resilience of instalment sales in part reflects a shift in household preferences towards bigger and more pricier cars, such as light commercial vehicles (LCVs) and sports utility vehicles (SUVs). Overall, household credit growth averaged 6.3% in 2023, down from 6.8% in 2022.
The trade balance (not seasonally adjusted) revealed a surplus of R14.1 billion in December 2023, marking a moderate decline from the revised surplus of R20.5 billion (previously R21.0 billion) in November 2023. December's surplus was driven by an 11.5% monthly decrease in exports to R163.9 billion, influenced by declines in export volumes of gold, platinum, and vehicles. Simultaneously, imports contracted 9.0% m/m to R149.9 billion, primarily due to a significant reduction in imports of original equipment components, crude oil, wheat, and meslin.
For 2023, the trade balance surplus totalled R61.0 billion, representing a substantial compression from the R192 billion recorded in 2022. This shift was driven by robust import growth of 8.8%, while exports expanded more modestly by 1.3%. These trends align with our latest estimate for the current account deficit, projected at 1.8% of GDP in 2023, compared to 0.5% in 2022. Looking ahead, we anticipate a further widening of the current account deficit, averaging 2.9% of GDP between 2024 and 2026, as export volumes remain constrained by domestic structural bottlenecks.
The Manufacturing PMI experienced a sharp decline, dropping below the 50-neutral mark to 43.6 points in January 2024 from 50.9 points in December 2023. This indicates a deterioration in business conditions for manufacturers at the beginning of the year. The decline was primarily driven by a sharp drop in the PMI Business Activity Index, falling to 37.1 from 51.4. New sales orders decreased by 9.1 points to 37.2, and inventories dropped by 6.7 points to 37.7.
The decrease in business activity occurred despite relatively subdued electricity load- shedding but reflected weak domestic and external demand. Despite the challenges faced by manufacturers, there was a slight improvement in optimism about future business conditions. The index for expected conditions in six months rose to 58.7 from 57.9.
NAAMSA's New Vehicle Sales declined for a sixth consecutive month in January, recording -3.8% y/y from -3.3% in November, as passenger car sales slid deeper into contraction. Nevertheless, at 41 636 units in January, domestic sales were 3.2% higher compared December. Passenger cars contracted by 6.7% y/y, worse than the 3.9% decline in December, weighed on by low consumer demand. On the commercial side, light and medium commercial vehicles increased by 2.3% and 13.3% y/y, while heavy and extra heavy vehicles increased by 1.8% and 11.6% y/y, respectively. The weak domestic sales reflect the lingering economic headwinds, including high cost-of-living, tight monetary policy conditions as well as energy and logistics infrastructure constraints.
Electricity (generation) production increased by 4.3% y/y in December 2023, rebounding from the 3.0% decline recorded in November 2023. On a seasonally adjusted basis, critical for quarterly GDP calculations, electricity production expanded by 1.1% m/m in December, partially recovering from the 2.3% contraction observed in November. Despite the limited monthly rebound, the robust growth at the beginning of the fourth quarter contributed to a 2.7% quarterly expansion in electricity production, accelerating from the 1.0% growth recorded in 3Q23.
This positive performance suggests that the electricity sector, even without data for gas and water divisions, contributed favourably to 4Q23 GDP growth. This aligns with our expectation of GDP expanding by 0.5% in the fourth quarter after contracting by 0.2% in the third quarter.
Week ahead
On Wednesday, the gross foreign reserves data for January 2024 will be released. In December 2023, gross reserves improved to US$62.52 billion from US$61.72 billion in the previous month. The increase was mainly due to a US$632 million rise in foreign exchange reserves, which include foreign currency deposits, a US$121 million increase in gold reserves, and a US$44 million increase in Special Drawing Rights. Gross foreign reserves play a crucial role in maintaining import cover. At the end of the third quarter of 2023, the level of import cover, representing the value of gross foreign reserves relative to the value of merchandise imports, services, and income payments, increased to 5.5 months from 5.2 months at the end of the previous quarter. However, South Africa's import cover, even at these improved levels, remains below the estimated global average of 9.0 months at the end of 2022 and the average of 10.6 months for Brazil, Russia, India, and China.
On Thursday, manufacturing production data for December 2023 will be released. In November, production expanded by 1.9% y/y, slightly moderating from the 2.3% growth observed in October. The seasonally adjusted output, which aligns with the official calculation of quarterly GDP growth, increased by 0.8% m/m, rebounding from a 0.1% monthly decline in the previous month. This aligned with the Manufacturing PMI Business Activity Index, which rose by 5.7 to 46.0 points in November. The recovery in the business activity index extended into December, reaching 51.4 points, indicating a likely continued monthly increase in manufacturing production at the end of last year.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 Jan | SA | Private Sector Credit % y/y | Dec | 4.9 | 3.8 |
| 31 Jan | SA | Trade Balance R billion | Dec | 14.1 | 20.5 |
| 1 Feb | SA | Manufacturing PMI | Jan | 43.6 | 50.9 |
| SA | New Vehicle Sales % y/y | Jan | -3.8 | -3.3 | |
| SA | Electricity Production % y/y | Dec | 4.3 | -3.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 7 Feb | SA | Gross Foreign Reserves $ billion | Jan | 62.5 | |
| 8 Feb | SA | Manufacturing Production % m/m | Dec | 0.8 | |
| Manufacturing Production % y/y | Dec | 1.9 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,469.95 | 0.6% | -1.6% | -6.7% |
| USD/ZAR | 18.59 | -1.4% | 0.2% | 9.2% |
| EUR/ZAR | 20.21 | -1.2% | -0.5% | 8.0% |
| GBP/ZAR | 23.68 | -1.2% | 1.1% | 12.4% |
| Platinum US$/oz | 913.29 | 2.4% | -7.0% | -9.0% |
| Gold US$/oz | 2,054.89 | 1.7% | -0.2% | 5.4% |
| Brent US$/oz | 78.70 | -4.5% | 3.7% | -5.0% |
| SA 10 year bond yield | 10.56 | -0.7% | -1.1% | 2.8% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.2 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.8 | 1.5 | 1.8 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 5.0 | 3.7 | 4.5 | 3.9 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.8 | 4.7 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 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 | 18.05 | 17.52 | 18.33 |
