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SA’s economic growth is forecast to decelerate in the third quarter

Economic growth in South Africa is expected to decelerate in the third Quarter as the lagged effects of the upwards interest Rate cycle since November 2021 and accelerating inflation continue to affect consumer spending, in spite of the improvements on the productive sectors on the back of reduced power cuts.

This comes as the BankservAfrica’s Economic Transactions Index (BETI) recently showed that the value of economic transactions in the economy declined by 0.7% in the third quarter, indicating the potential for lower gross domestic product (GDP) in the period.

The BankservAfrica BETI is a robust early economic scorecard for South Africa in general, specifically in terms of growth trends, and correlates highly with the South African Reserve Bank’s (SARB) co-incident indicator, as well as with GDP figures, while appearing quarter earlier.

Indeed, BankservAfrica said there were bleak prospects for the economy’s growth in the third quarter.

Economic activity recovered further in the second quarter with GDP accelerating to 0.6% as load shedding proved less severe, following 0.4% subdued growth in the first quarter on weakened factors of production including port and rail constraints, and load shedding.

Investec chief economist Annabel Bishop on Friday said the contraction in BankservAfrica’s BETI already indicated risks, signalling a muted economic growth performance in the third quarter, weaker than the second quarter, and with a probability of a negative quarterly growth rate.

Bishop said the lagged effects of the upwards interest rate cycle of a cumulative 475 basis points since November 2021, and over 2022 and 2023, were affecting consumer spend.

According to the SARB, real final consumption expenditure by households contracted in the second quarter along with a further deterioration in consumer confidence and a decline in the real disposable income of households, which was affected by higher interest rates.

Household debt to disposable income also edged higher to 62.5% in the second quarter as the pace of increase in the seasonally adjusted level of debt marginally outpaced growth in nominal disposable income.

Consumer price inflation in September jumped to 5.4% from August’s 4.8%, indicating fuel and food price pressures on economic activity.

“October is expected to see consumer price inflation at a similar pace to September’s, but then followed by some easing in November and December,” Bishop said.

“A further interest rate hike is not expected in South Africa, but remains a risk, although consumers are under pressure.

“Overall, incoming data from many different sources point to a weak year for 2023, while 2024 is expected to see a modest pickup, to around 1.0% year-on-year.”

Earlier this month, the International Monetary Fund (IMF) revised upwards its 2023 growth forecast for South Africa, from 0.3% to 0.9% on the rebound of electricity generation though the logistical challenges were still a constraint.

However, the IMF warned that inflation was still too high, borrowing costs were still elevated, and exchange-rate pressures still persisted.

Oxford Economics Africa on Friday concurred that the acceleration in headline inflation to 5.4% in September raised the prospects of further tightening by the SARB ahead of its November policy meeting. With Monetary Policy considered restrictive, it is going to be a tight call.

The SARB's Monetary Policy Committee (MPC) kept the repo rate unchanged at 8.25% per annum at the two most recent meetings, in July when headline inflation eased to 5.4%

Oxford senior economist Jee-A van der Linde said although further interest rate increases cannot be ruled out for the upcoming MPC meetings, they believed that a higher-for-longer approach was appropriate and that, therefore, rates should remain on hold at current levels

Van der Linde said their base case was for the repo rate to remain unchanged at 8.25% in 2023, but conceded rising odds for a repo rate lift in November.

“The most recent inflation print means that the hawkish SARB must now carefully ponder South Africa's monetary policy path: either pursuing a ‘Table Mountain’ strategy of keeping rates high for longer or a ‘Matterhorn’ approach of further tightening followed by rapid easing,” van der Linde said.

“Although we have noted previously that further interest rate increases cannot be ruled out for the upcoming MPC meetings, we believe that a higher-for-longer approach is appropriate.

“The economy is experiencing cost-push inflation, and with monetary policy still restrictive, the lagged impact of a 25-bps (basis points) increase is unlikely to quell price pressures.

“Having said that, the SARB might feel compelled to tighten policy further given how much the US Fed has jacked interest rates. In any event, much will depend on the future actions of major advanced economy central banks, and domestic monetary policy will remain tight with the SARB expected to start cutting rates in the fourth quarter of 2024 only.”

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SA’s economic growth is forecast to decelerate in the third quarter


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