Stable supply of electricity and GNU will boost stronger rebound in economic growth

The stable supply of electricity and the GNU’s apparent support for continued reform in the critical areas of infrastructure are likely to boost private confidence and investment in the long term, an Absa economist says, while a stronger rebound in economic growth is expected for the second quarter.

Presenting Absa’s quarterly perspectives for the third quarter on Wednesday, Miyelani Maluleke, senior economist and head of South Africa macroeconomics research at Absa, said the bank now lifts its 2024 real gross domestic product (GDP) growth forecast to 1.1% by 0.2 percentage points and now sees 2025 growth at 2.0% (+0.3 percentage points).

“Early perceptions of the government of national unity (GNU) suggest that the new administration will continue on the reform path championed by the Operation Vulindlela initiative. Given the uncertainty regarding governance and policy before the recently concluded elections, we believe that the GNU outcome and its support for macro stability and continued reform should bolster confidence and economic growth.”

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Consumers to remain under pressure despite economic growth

However, he said, consumers will remain under pressure, but financial strain should begin to ease. “The combination of below-inflation wage growth and high borrowing costs have weighed on real spending growth and added to consumer debt distress. While we believe that financial pressure on consumers will persist for some time, the strain should begin to ebb.

“Inflation is on a firm softening trajectory and cost-of-living pressures should moderate further as rates start easing. We expect the two-pot retirement system to result in early withdrawals of R44 billion before year-end and a further R34 billion in 2025, although these estimates carry a high degree of uncertainty.”

He also shared the good news that inflation’s return to target is now in sight. “Inflation has eased faster than expected over the past quarter, mostly due to core and food inflation. Even as some pass-through from higher maize prices begins to show, overall food inflation is likely to remain contained.

“A stronger exchange rate and limited demand pull should also keep core benign. We now expect headline CPI inflation to hit 4.4% in September and average at 4.1% in the fourth quarter and 4.3% in 2025.”

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Shallow repo rate cutting cycle expected in September

Sello Sekele, economist at Absa, said Absa expects the South African Reserve Bank (Sarb) to begin a shallow repo rate-cutting cycle in September. He pointed out that the July Monetary Policy Committee (MPC) statement made it clear that there is active discussion among Sarb MPC members about the timing of cutting rates.

“With inflation likely to reach the mid-point much earlier than what we and the MPC expected, we believe that the balance of MPC member views (4:2 in favour of a hold in July) will tilt towards a cut soon.

“We bring our forecast for the start of the cutting cycle forward by one meeting to September. We expect cuts of 25 basis points in each of the next four MPC meetings, ultimately leaving the repo rate at 7.25%.”

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What to expect for the rest of the year regarding economic growth

On what to watch in the months ahead, Maluleke said the GNU’s ability to get down to work and deliver on reform implementation will be important for confidence and economic growth. “From a macro policy perspective, the tabling of the Mid-Term Budget Policy Statement (MTBPS) in late October will be key.

“We expect a main budget deficit of 4.0% (with Eskom debt relief below the line) of GDP for 2024/25, 0.3 percentage points narrower than the National Treasury’s target. Externally, any shift in the Fed’s stance would be important for the exchange rate, while Brent crude oil prices will be key for the pace of domestic disinflation.”

Maluleke and Sekele also expect that the financial strain on consumers should ease slightly after a string of weak financial results from listed consumer-facing businesses recently brought some focus to the consumer.

“Financial pressure has mounted against consumers from multiple sources. Wage growth has been muted and generally tracked below CPI inflation over the past two years, according to Stats SA data. This has dealt a blow to households’ disposable income.

“Meanwhile, the sharp increase in interest rates since late 2021 has also lifted debt service costs rapidly, and the adjustment is likely to have been more severe for households that took out debt in 2021 and early 2022, when rates were relatively low.”

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Spending data shows how consumers battle financially

They said the effects of this challenging backdrop for consumers can be seen in the spending data. Real total household consumption expenditure fell by 0.3% in the first quarter compared to the previous quarter, while consumer debt distress also worsened.

Data from the National Credit Regulator show that the proportion of consumer debt in arrears (defined as an overdue credit repayment obligation of three or more months) rose further to 8.6% in the first quarter from 8.4% in the previous quarter.

Maluleke says the last time arrears were at this level was in the fourth quarter of 2010. “However, there are reasons to believe that the strain should start to ease in the quarters ahead.”