The Outlook for South Africa is Bleak, and a Recession is Likely
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The Outlook for South Africa is Bleak, and a Recession is Likely

Nedbank, a South African financial institution, has released its Guide to the Economy for 2023, which predicts a dismal outlook for the nation as load shedding keeps destroying its economy. According to the organisation, 2023 “remains gloomy” since the ongoing electricity crisis will continue to damage output and sales across all sectors.

With the consensus among Nedbank economists being that the economy grew by zero percent in the first quarter and that it will stay poor for the rest of the year, Johannes Khosa warned that the country still faces a significant risk of falling into a technical recession. Consumers will likely be increasingly wary due to rising prices, interest rates, and fears about their employment prospects, he said.

Renewable energy projects and government spending are expected to drive a gradual but positive trend in fixed investment. As long as exports fall more quickly than imports, net exports will be a negative factor. Khosa predicts that real GDP growth in South Africa would be around 0.2% for the full year, which is in line with the most recent forecasts from the South African Reserve Bank. This is a decrease from the 0.7% projection made in the prior report.

Especially in light of the deepening electrical situation and considerable global headwinds, the outlook is fraught with significant downside risks. This pertains to inflation, which showed up higher than expected in both February and March, keeping the SARB’s Monetary Policy Committee under duress.

Khosa predicted that the MPC would increase interest rates by another 25 basis points in May since inflation remained above the 3% to 6% target range. He forecasts a continuation of current interest rate levels until 2024, following which he anticipates a decline of 100 basis points (bps).

“With inflation falling only gradually, the MPC is anticipated to keep its hawkish stance. The rand would certainly remain sensitive to future hikes in US interest rates, on top of the sticky food costs, uncertainty regarding the price consequences of load-shedding, and the significant jump in power tariffs. We anticipate another rate hike of 25 basis points in May, bringing the repo rate and prime lending rate to their highest levels ever of 8% and 11.50%, respectively. He predicted that the easing cycle will start in early 2024.

Burning Sensations When Lightening a Load

Khosa characterised the power outages as “relentless” and said they had disrupted business across all sectors of the economy. This finding was consistent with the findings of other analysts and economists who had reviewed domestic economic statistics. Financial services saw the largest quarterly decline in value-added among the 10 largest industries, followed by retail, food service, and lodging. Constant outages at Eskom’s power units have led to a decline in value added by electricity and water for the third consecutive quarter, he noted.

Export-driven sectors were hit hard by a combination of factors, including decreased demand in the biggest economies and cheaper raw materials on the worldwide market. The outcome was a decline in activity in the mining and industrial sectors.

Despite households’ limited financial resources, the value-added of personal services increased in the fourth quarter. The growth of the construction, transportation, and communication industries was also moderate. In terms of outlays, Khosa said that recent numbers have been “mixed,” but they nonetheless imply that the economy suffered significant difficulties at the start of 2023.

Repeated Load Shedding Has Been a Major Problem

The economist noted that the frustrations stemming from power outages were still a major factor in people’s general lack of optimism. Growth forecasts for the rest of the year were drastically reduced as a result. From 0.3% in January and 1.1% in November of last year, the SARB lowered its real GDP growth prediction for 2023 to 0.2% in March. In October, the National Treasury released the Medium-Term Budget Policy Statement (MTBPS), in which it predicted growth of 1.4% through February. By February, however, that prediction had been lowered to a more modest 0.9%.