South African outlook

The outlook for the domestic economy remains uncertain given the moderating global growth in major economies and moderating commodity prices. More so, high interest rates, prolonged electricity outages, a gradual progress in structural reforms and ongoing political uncertainty continue to weigh on economic activity. In 2022 the economy was faced with more than 200 days of load shedding resulting from failing power stations and generation incapacity.

Eskom estimates the likelihood of about 4500MW in shortage of electricity in 2023, which means that on average, a minimum of stage three load shedding. The impact of load shedding has extended across all sectors and impacts energy-intensive industries such as agriculture, mining and manufacturing the most. When adjusted for weekends, public holidays and non-conventional working hours, one additional GWh of load shedding is estimated to lower quarterly growth in real GDP by 2.3 percentage points, on average.

We expect real GDP to average 1.9% in 2022 and slow further to 1.1% in 2023 and 1.4% in 2024, remaining below 2.0% over the medium term. A low-growth environment will impact investor sentiment, investment returns as well as funding and operating costs.

Headline inflation peaked in H2 2022 and will continue its gradual downtrend in 2023. We expect inflation to average 6.8% for 2022 and moderate to 5.3% in 2023 and 4.6% in 2024. Our view is supported by the recent retreat in inflation expectations and lower fuel prices in line with the lower international oil price. Food prices will be supported by the sharp easing in grain prices reflecting the lag of global food prices. Services inflation will continue to counter the elevation in goods inflation.

With our base case inflation forecast falling back within the South African Reserve Bank’s (SARB) 3%-6% target in 2023, we expect that we may be reaching the end of the rate hiking cycle. In our view, the SARB is set to continue hiking rates but at a much slower pace. The repo rate will increase from 7.00% by at least 25bps in Q1 2023 to peak at 7.25% on the back of the relatively stable exchange rate, lower fuel prices and gradual easing of food price pressures. We expect the SARB to dampen demand by maintaining interest rates at this level, in line with the forward rate agreement (FRA) curve’s expectation before rate cuts commence in 2024.

Despite the labour market recovery from the coronavirus pandemic, devastating KwaZulu-Natal floods and the July 2021 social unrest, it remains very weak and still faces several downside risks. These risks include a slowing global economy and weaker domestic growth, tighter financial conditions, subdued fixed investment, the deteriorating electricity supply weighing heavily on businesses financially as well as disrupting trading hours. The unemployment rate is likely to remain above 30% over the medium term as half of the sectors’ real GDP remains below pre-pandemic levels.