Domestic economic conditions are incrementally becoming unfavourable. At the end of last year, we, together with consensus, projected that economic growth would moderate to just north of 1%, from around 2% in 2022. Since then, load-shedding at a higher intensity has proven extremely harmful to general economic activity and resulted in a subsequent downward revision to growth expectations. This is even as some businesses with sufficient capital cushion themselves by investing in alternative energy sources. The global environment has also become less supportive, while domestic logistical challenges continue to harm export competitiveness. These and, critically, weakening consumer fundamentals, imply that the domestic economy will likely stall this year before gradually recovering over the medium-term. In line with these mounting idiosyncratic challenges, we have provisionally trimmed our growth forecast to 0.1%, from the 0.4% published in January.
Key features of our outlook
Over and above moderating growth in some of our trading partners, bar China, key idiosyncratic headwinds underpin our growth outlook. Crucially, we are increasingly concerned about the impact of ongoing load-shedding across a significant share of businesses, which remains a key source of economic uncertainty. Year-to-date (YTD), Eskom's energy availability factor has averaged around 52.6%, lower than the corresponding period in 2021 and 2022. Unplanned outages (33.7% of generation capacity YTD) continue to reflect a volatile electricity grid, making the operating environment and broad-based fixed investment decisions harder. We acknowledge energy generation outside of Eskom, as reported by Stats SA. However, these are still low as a share of total electricity generation. Electricity from other sources amounted to 7 278 MW in 2022, reflecting a 1.8% y/y decline from 2021. This equates to roughly 11% of total energy generation, but Stats SA does not yet fully capture all private sector energy generation, that is, anecdotally, currently cushioning some businesses.
On the expenditure side, consumption expenditure, the most significant component of GDP accounting for over 65%, is confronted by weakening consumer fundamentals sooner than initially envisaged. Household purchasing power is severely constrained by elevated consumer prices and rising interest rates, weighing on discretionary income. In addition, nominal labour income growth has moderated and is expected to remain limited amid load-shedding costs incurred by businesses. Although, some sectors may be able to cater for reasonable wage growth demands. Recent confidence survey results show that consumers are concerned about the domestic economic outlook and, as such, are expected to cut down, particularly on discretionary and interest rate-sensitive spending. At the end of 2022, the household savings rate as a share of disposable income fell to 0%, reflecting diminishing buffers that consumers emerged with out of the pandemic lockdown. Notably, this preceded the 75bps interest rate increase that the SARB implemented this year. In addition, the employment level has not recovered to the pre-pandemic level and is now at the mercy of slowing economic growth.
High-frequency retail trade data from Stats SA shows that YTD (January - February) total sales volumes are down by 0.6%, reflecting demand weakness for durables (-4.5% y/y YTD) and non-durables (-1.2% y/y YTD), while semi-durables are marginally up by 2.3% y/y YTD. Combined, all this points to weakening consumer spending momentum (see last week's report). We now pencil in consumption expenditure growth of around 0.8% this year, reduced from 1.5% previously.
Current account deficit to widen
The current account balance recorded a surplus of 1.8% of GDP and 3.7% of GDP in 2020 and 2021, respectively, boosted by favourable export prices relative to import prices (i.e., terms of trade) and export volumes, which were higher than import volumes. However, the surplus was short-lived as terms of trade deteriorated, and import volumes significantly caught up with export volumes. Subsequently, the current account recorded a deficit of 0.5% of GDP in 2022, which we expect to widen further, averaging around 2.6% of GDP over the medium-term. This is premised on real net exports remaining negative even as import volume growth reflects weaker domestic demand. It also highlights subdued export volumes amid reduced export competitiveness and low external demand. Our commodity price index also reflects further weakening terms of trade while nominal GDP growth is slower compared to the past two years.
Overall, economic growth per our forecast is stalling, and uncertainty remains elevated. Nevertheless, economic activity should increase next year, averaging around 1.6% over the medium-term.
Week in review
Headline inflation edged up to 7.1% y/y in March, from 7.0% in February, and had monthly pressure of 1.0%. Core inflation was flat at 5.2% but had monthly pressure of 0.8%, with the education survey results as well as alcoholic beverages and tobacco explaining half of this monthly acceleration. Fuel lifted by 4.5% m/m and 8.1% y/y, down from 10.9% previously. Food and non-alcoholic beverages (NAB) inflation continued lifting, posting 1.0% m/m and 14.0% y/y, from 13.6% previously. The monthly pressure was from vegetables, dairy and eggs, cereals, miscellaneous foods, as well as NAB. We predict inflation of 7.0% y/y and 0.5% m/m in April, this is as survey outcomes on insurance provide further upward monthly pressure. We project headline inflation of 5.9% on average in 2023 and remaining above target over the medium-term. This reflects the impact of frictions as geopolitical tensions fracture global markets, likely keeping imported inflation elevated and compounding the effects of a weaker rand-dollar exchange rate and a higher cost of doing business in SA.
Retail sales volumes for February declined by 0.5% y/y, marking a third consecutive month of annual decline. The seasonally adjusted volumes slid by 0.1% m/m, following a 1.5% m/m increase in January and a 0.5% decline in December. As such, three months-on-three months, volume sales are still higher by 1.2%, suggesting a slight positive contribution from the retail trade sector to 1Q23 GDP so far. However, other high frequency data corroborates our view that the economy likely slipped into a mild recession in 1Q23. The sharp increase in production and operational costs induced by load-shedding, will weigh on corporate margins and consequently, employment and wage gains. While non-labour income remains resilient, the outlook is less optimistic, mainly due to weaker corporate earnings prospects and their impact on dividend pay-outs. These, combined with elevated inflation and debt servicing costs, as well as depressed consumer confidence, suggests muted household consumption expenditure going forward. Nevertheless, the credit market remains active, with consumers accumulating consumption credit at a faster pace, which could provide auxiliary support to household consumption. However, this may also increase the risk of credit defaults due to slower income growth and the accumulation of more expensive lines of credit, resulting in strained household financial positions down the line.
Week ahead
The leading business cycle indicator for February will be released on Tuesday. The leading business cycle indicator measured 120.8 points in January, reflecting a 0.1% m/m and 5.3% y/y decline. The weakness in the leading indicator was broad-based, with eight constituent variables declining while only two increased. Notably, residential building plans passed, and South Africa's US dollar-denominated export commodity price index constituted the most considerable drag on the leading indicator. Generally, the leading indicator informs our view of the elevated risk of recession or subdued quarterly growth profile. The high-frequency data to date is pointing to a mild recession, with the persistence of load-shedding at a higher intensity being a key feature. Nevertheless, the prevailing economic environment is highly volatile and uncertain, with wide prediction bands.
On Wednesday, data on producer inflation for March will be published. In February, producer inflation slowed further, reaching 12.2% y/y from 12.7% y/y in January. Monthly producer price pressure was 0.6%, rebounding from a 0.6% monthly decline in the prior month. Intermediate producer price inflation, a measure of product prices as they enter the production process, slowed further, reaching 5.0% y/y from 5.6% y/y in January, with a -0.1% monthly decline compared to -1.7% m/m in January.
Data on private sector credit extension (PSCE) for March will be released on Friday. PSCE growth slowed marginally in February, to 8.3% y/y from 8.4% y/y in January. Corporate credit extension was unchanged at 8.8% y/y, while household credit slowed to 7.6% y/y from 7.9% y/y previously. The growth in corporate credit was predominantly supported by the uptake of mortgages, which accelerated to 7.0% y/y from 6.4% previously, the quickest pace since September 2020. The growth in general loans and advances remained robust at 13.2% y/y, while overdraft facilities spiked to 22.5% y/y from 17.5% previously. Meanwhile, household credit growth moderated in February, primarily due to slower growth in unsecured credit uptake, for the first time in 17 months. Within the unsecured category, general loans grew by 10.0% y/y from 11.0% previously, and overdrafts by 8.1% y/y from 8.6% in January. Meanwhile, credit cards grew by 8.9% y/y, unchanged from the previous month. Within the secured category, instalment sales (predominantly car finance) grew by 7.7% y/y, down from 8.1% previously, while mortgage advances slowed marginally to 6.9% y/y from 7.0% y/y in January. Demand for private sector credit continues to find support from both corporates and households, as investment into self-generation and load-shedding mitigation measures intensify. Nevertheless, the broader economic weakness and higher borrowing and debt servicing costs could curtail the extent of this upside.
Also on Friday, data on the trade balance for March will be published. In February, the trade balance amounted to R16.13 billion surplus from a R22.71 billion deficit in January. The surplus reflected monthly export growth of 10.7%, while imports declined more significantly by 14.8%. Compared to the same month last year, exports grew by 8.7%, reflecting a slight increase from 6.7% in January. Meanwhile, imports grew by 5.9%, reflecting a significant moderation from 28.1% in January. Nevertheless, imports are up by 16.8% Y TD, while exports are up by 7.7%. This is consistent with our view of a wider current account deficit.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 19 Apr | SA | CPI m/m | Mar | 1,0% | 0,7% |
| SA | CPI y/y | Mar | 7,1% | 7,0% | |
| SA | CPI Core m/m | Mar | 0,8% | 0,8% | |
| SA | CPI Core y/y | Mar | 5.2% | 5.2% | |
| SA | Retail Sales m/m | Feb | -0,1% | 1,5% | |
| SA | Retail Sales y/y | Feb | -0.5% | -0.8% |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 25 Apr | SA | Leading indicator | Feb | -- | 120.8 |
| 26 Apr | SA | PPI y/y | Mar | -- | 12.2% |
| SA | PPI m/m | Mar | -- | 0,6% | |
| 28 Apr | SA | Private sector credit y/y | Mar | -- | 8,3% |
| SA | Trade balance (Rand billion) | Mar | -- | 16,1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 78,883.26 | 0,5% | 6.2% | 6.9% |
| USD/ZAR | 18.03 | -0.1% | -2.6% | 20.0% |
| EUR/ZAR | 19.79 | -0.8% | -0.3% | 21.3% |
| GBP/ZAR | 22.44 | -0.7% | -1.3% | 14.2% |
| Platinum US$/oz | 1,096.76 | 4.2% | 10.5% | 10.8% |
| Gold US$/oz | 2,004.80 | -1.7% | 1.3% | 2.4% |
| Brent US$/oz | 81.10 | -5.8% | 9.9% | -24.1% |
| SA 10 year bond yield | 10.06 | 1.9% | 1.1% | 1.9% |
FNB SA Economic Forecast
| Economic Indicator | 2020 | 2021 | 2022 | 2023f | 2024f |
|---|---|---|---|---|---|
| Real GDP %y/y | -6.3 | 4.9 | 2.0 | 0.4 | 1.4 |
| Household consumption expenditure % y/y | -5.9 | 5.6 | 2.6 | 0.8 | 1.4 |
| Gross fixed capital formation % y/y | -14.6 | 0.2 | 4.7 | 3.6 | 3.2 |
| CPI (average) %y/y | 3.3 | 5.9 | 7.2 | 5.9 | 5.4 |
| CPI (year end) % y/y | 3.1 | 5.9 | 7.2 | 5.0 | 5.4 |
| Repo rate (year end) %p.a.* | 3.50 | 3.75 | 7.00 | 7.75 | 7.50 |
| Prime (year end) %p.a.* | 7.00 | 7.25 | 10.50 | 11.25 | 11.00 |
| USDZAR (average) | 16.60 | 14.80 | 16.40 | 17.70 | 17.70 |
*Growth outlook has been provisionally revised
