Finance Minister Enoch Godongwana has pinned his hopes on the demand for commodity exports that might arise from China, possible growth in household consumption, and a potential for an increase in investment to avoid an economic recession this year.
This comes as Godongwana, while attending the International Monetary Fund (IMF) Spring Meetings in Washington DC last week, ruled out the possibility of a recession this year.
“I rule out that possibility this year. We're not going to record successive negative quarters. I don't think that's going to be possible,” Godongwana told Reuters.
Godongwana’s laundry list of scenarios that can avert the looming catastrophe on South Africa’s economy, however, sounds like wishful thinking considering that various forecasts see near zero growth in 2023.
To make things worse, South Africa’s economy is forecast to have fallen into a technical recession in the first quarter of 2023 following a negative 1.3% growth in the fourth quarter of 2024 due to intensified power cuts.
In its World Economic Outlook report, the IMF said the outlook for the South African and world economy was fraught with uncertainty.
The IMF revised its growth forecast for South Africa significantly lower to 0.1% in 2023, down from 1.2% predicted six months ago.
The SA Reserve Bank (SARB) last month also lowered its gross domestic product (GDP) forecast slightly to 0.2% from a previous forecast of 0.3% made in January.
The SARB said intensified load shedding – which has risen to Stage 6 – and logistical constraints have deducted at least 2 percentage points from growth this year.
Speaking exclusively to Business Report on his return from the IMF meetings, Godongwana admitted that South Africa was without doubt facing a challenging 2023 and that predicting economic growth was always tricky.
He reiterated what he said during the Budget Review in February that 2023 would be a difficult year due to the strained global environment and severe constraints locally, especially in electricity supply and logistics.
He said the fourth quarter GDP outcome was disappointing and reflected the negative impact of these structural constraints on growth.
“Despite this, there is still some impetus for growth this year, particularly from an export demand perspective, and this is especially true when you consider the positive impact from China after it scrapped its Zero-Covid policy late in 2022,” Godongwana said.
“And despite high inflation and its impact on the cost of living, we still expect some growth in household consumption this year.”
However, it is difficult to remain optimistic about the potential growth of household consumption this year as the rising cost of living has crowded out any disposable income.
Consumer headline inflation data released this week showed that prices edged higher to 7.1% year-on-year in March, from 7.0% in February and 6.9% in January, as food prices rose the highest in 14 years.
Sticky inflation will likely prompt the SARB to hike interest rates again next month after raising its benchmark lending rate by a surprising 50 basis points in a split decision to 7.75% per annum.
SARB Governor Lesetja Kganyago, however, said that despite the surprise acceleration in March's inflation, he still believes that inflation will ease over the course of this year and eventually settle within the central bank’s target range.
Nedbank economist Johannes Khosa contradicted Godongwana, saying that growth in consumer spending was expected to slow as household incomes were already under considerable pressure.
Khosa also said higher interest rates had already pushed debt service costs up significantly, consuming 8.1% of disposable income at the end of 2022 from only 7% at the end of 2021, thus debt service costs were forecast to increase to over 9% of disposable income by the end of the year.
“These levels are historically associated with more significant financial stress,” Khosa said.
“It is expected to reduce the funds available for discretionary spending and dampen demand for credit during the remainder of this year and into the early part of next year.
“As a result, consumer spending is forecast to slow to only 1% in 2023, down from a robust 2.6% in 2022 and 5.6% in 2021.
“Given continued upside risks to inflation and interest rate prospects and the threat of renewed job losses, the uncertainty in our forecast for consumer spending means it is still skewed to the downside.”
Meanwhile, Godongwana said that looking beyond the immediate energy situation, there remained significant potential for investment growth.
“Our focus on providing a policy environment that is supportive of investment is gaining momentum,” he said.
“The 4.7% year-on-year growth in gross-fixed-capital formation over 2022 is evidence that we are on the right track.
“So too is the recent announcement by President (Cyril) Ramaphosa at the Investment Conference last week that we have exceeded our target.”
BUSINESS REPORT