Gloomy with a high chance of recession

Finance group Nedbank has published its Guide to the Economy for 2023, projecting a bleak forecast for the country as load shedding continues to batter its prospects.

The group said that the outlook for 2023 “remains gloomy”, noting that the persistent electricity shortage will continue hurt production and sales in all industries

Nedbank economist Johannes Khosa also said that the chances of the country slipping into a technical recession remain high, with the group’s base view that the economy recorded zero growth in the first quarter – and that the economy will remain weak for the remainder of the year.

“Consumers are expected to be more cautious as elevated inflation and higher interest rates weigh on incomes, and concerns over job security erode confidence,” he said.

“Fixed investment is forecast to increase, albeit at a slower pace, buoyed by renewable-energy projects and spending on public infrastructure. Net exports will remain a drag as exports contract faster than imports.”

Overall, for the full year, Khosa expects real GDP growth in South Africa of around 0.2% – in line with the current projections from the South African Reserve Bank. This is down from 0.7% forecast at the time of the previous report.

Unfortunately for the country, the forecast faces significant downside risks, especially given the worsening electricity crisis and significant global headwinds.

This includes inflation, which surprised on the upside in both February and March’s print, pointing to continued pressure on the SARB’s Monetary Policy Committee to act.

“With inflation still above the 3% to 6% target range, the MPC is likely to hike interest rates by another 25 bps in May,” Khosa said. Thereafter, he expects interest rates to remain unchanged before falling by a cumulative 100 bps in 2024.

“With inflation likely to recede only slowly, the MPC is expected to remain hawkish. On top of sticky food prices, uncertainties surrounding the price implications of load-shedding, and the sharp rise in electricity tariffs, the rand will likely remain vulnerable to further hikes in US interest rates.

“While the outlook is exceptionally murky, we forecast one more rate hike of 25bps in May, taking the repo rate and prime lending rate to peaks of 8% and 11.50%, respectively. The easing cycle is expected to begin in early 2024,” he said.

Load shedding pains

As has been the recurring thread across all domestic economic data and analyst and economist reviews, load shedding remains the key drag on the economy, with Khosa noting that outages have been “relentless” and disruptive to activity in all industries.

“Seven of the 10 major sectors contracted over the quarter, with the main drag stemming from lower value added by finance, followed by trade, catering, and accommodation. Value added by electricity and water also contracted for the third consecutive quarter due to constant breakdowns at Eskom’s power stations,” he said.

In addition to power shortages, export-oriented industries were hurt by slower demand in major economies and lower global commodity prices. As a result, the manufacturing and mining industries contracted.

Personal services surprised to the upside despite tight household finances, with value-added rebounding following a decline in the third quarter. Construction, transport and communications also expanded, albeit at slower rates.

On the expenditure side, the latest statistics have been mixed, Khosa said, but they suggest that the economy encountered further setbacks in early 2023.

Again, persistent load shedding remained the key issue.

“The frustrations caused by power shortages continued to weigh on confidence,” the economist said.

As a result, growth prospects for the remainder of the year have been downgraded significantly. The SARB revised its real GDP growth forecasts for 2023 to 0.2% in March from 0.3% in January and 1.1% in November last year.

National Treasury reduced its forecast to a subdued 0.9% in February from 1.4% at the time of the Medium Term Budget Policy Statement (MTBPS) in October last year.

Read: Bad news for interest rates in South Africa

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