South Africa Faces Continued Economic Challenges

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The BankservAfrica Economic Transactions Index (BETI), which provides a standardized measure of all economic transactions in the South African economy, remained stagnant in January 2024, indicating that the economy is in a state of ‘muddle along’.

Shergeran Naidoo, Head of Stakeholder Engagements at BankservAfrica, noted that the BETI index for January held steady at 133.3 and showed only a marginal 0.4% improvement compared to the same period last year.

Despite some relief from load shedding and a reduction in fuel prices during January, the economy failed to gain traction during the initial month of the year. However, the recent escalation of load shedding to stage 6 and fuel price under-recovery could pose further challenges for the economy in the coming months.

According to Elize Kruger, an Independent Economist, prevailing conditions marked by elevated interest rates, high food price inflation, sluggish job market dynamics, low wage growth, and subdued confidence levels contribute to an underwhelming economic narrative.

Although December saw a welcome moderation in inflation to 5.1%, certain short-term factors like the weaker rand exchange rate, rising fuel prices, and notable increases in medical aid premiums may exert upward pressure on inflation indicators. Nevertheless, the headline Consumer Price Index (CPI) is forecasted to moderate toward the end of the year, averaging 5.3% in 2024 compared to 6.0% in 2023, which could alleviate erosion in purchasing power over time.

Additional nowcast indicators, such as the S&P Global South Africa Purchasing Managers’ Index (PMI), registered a slight increase from 49.0 in December to 49.2, reflecting challenges faced by businesses due to the Durban port crisis affecting delivery times and output capacity. Similarly, the Absa PMI declined to 43.6, its lowest level since the Covid-19 pandemic, indicating ongoing challenges in the manufacturing sector.

Total vehicle sales remained disappointing, with only 41,636 units sold in January, marking the sixth consecutive month of sales declines. This downturn is attributed to various factors including the cost-of-living crisis, load shedding, and logistical challenges.

Despite the current scenario, Kruger remains cautiously optimistic, anticipating a modest improvement in the latter half of the year. Lower international interest rates later in the year may bolster the rand exchange rate, thereby contributing to the anticipated moderation in consumer inflation and potentially paving the way for interest rate cuts.

A decrease in the intensity of load shedding compared to 2023 could lead to an acceleration in real GDP growth from an estimated 0.6% in 2023 to 1.3% in 2024. However, significant structural reforms are deemed essential to address South Africa’s socio-economic challenges, particularly the high unemployment rate, and to propel the economy out of its current low growth trajectory.