Nothing but grim darkness for SA’s 2023 economic outlook

South Africa’s economic outlook for 2023 is nothing but grim: no real possibility for growth and the ongoing rolling blackouts, while the country is probably already in a technical recession after two consecutive quarters of negative growth.

According to Deloitte’s latest economic outlook for South Africa, the economy faced a series of global and local disruptions, including slowing global growth, geopolitical tensions, acute power challenges, inefficiencies in state-owned enterprises and climate change.

Deloitte says if these challenges persist, the economy will continue to struggle, particularly in 2023, and to minimise further deterioration and create conditions for future growth, urgent action is needed to address supply-side constraints to the country’s growth, such as ensuring stable electricity access and improving freight and logistics.

After a strong rebound in economic activity in 2021, real gross domestic product (GDP) growth fell from an all-time decade high of 4.9% to 2% in 2022.

Many analysts expected growth of more than 2% in 2022, but substantially lower growth in the fourth quarter of –1.3% with seven of the 10 industries contracting during that quarter, dragged down annual GDP for 2022.

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Weak growth behind grim economic outlook

According to Statistics SA the South African economy expanded by only 0.3% since the outbreak of the pandemic between 2019 and 2022, a fraction of population growth during the time.

Six industries that included, most notably, construction, mining and manufacturing, are still lagging behind pre-pandemic levels of output.

Deloitte says the economic outlook for the immediate term is bleak and a scenario of flat to no growth is a real possibility for 2023.

National Treasury’s baseline forecast expected a moderate deceleration of growth to 0.9% in 2023, while the South African Reserve Bank (Sarb) was less optimistic at 0.3%, based on the key assumption of more than 250 days of rolling blackouts that will likely shave off up to two percentage points of GDP growth this year. The Sarb marginally revised down the growth outlook to 0.2%.

The International Monetary Fund (IMF) also slashed its 2023 forecast from 1.2% in January to a meagre 0.1%, also due to intensified rolling blackouts and an uncertain global environment.

Furthermore, employment is still running below pre-pandemic levels and elevated poverty and inequality are causes of concern in terms of social stability for a country going into an election year.

The rolling blackouts spare no industry and mining and manufacturing are likely to be among the worst affected. The year 2022 alone saw 200 days of load shedding, with the fourth quarter of 2022 the worst on record with only two days without rolling blackouts in 92 days.

Then came the first quarter of 2023 and it was even worse, with only one day of no rolling blackouts and longer blackouts on the other days. This translated into lower mining (–1.9%) and manufacturing production (–3.7%) for January compared to a year ago.

Domestic freight and logistics and flatter commodity prices meanwhile added insult to injury, further undermining growth prospects in the mining sector.

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Strained consumers buying less

Retail sales were down by –0.8% in January compared to a year ago and are likely to fall even further, primarily due to household finances remaining under pressure as a result of the ongoing cost-of-living squeeze, high inflation, pricier credit conditions and rolling blackouts.

While consumers remain under financial strain, businesses are exposed to higher costs. Increased global food and fuel prices have sent inflation rates over the Sarb’s inflation target band of 3% to 6% and headline inflation reached a 13-year high of 7.8% in July 2022. Sticky food prices and price pressures from rolling blackouts are the main culprits here.

According to the latest Deloitte South Africa Consumer Tracker, 41% of consumers feel that their financial position became worse over the past year and are concerned about their financial circumstances.

Deloitte says given the rising cost of food, consumers are not only making greater trade-offs, such as buying cheaper meat, more store brands and less costly ingredients, but are also more frugal, mostly saving by reducing food waste, buying only essentials and buying less than they want.

It was then also not surprising that the FNB/BER consumer confidence index tumbled to –23 points in the first quarter of 2023 from –8 in the fourth quarter, the third lowest index on record since 1994, with likely repercussions such as lower durable goods sales.

Consumers will likely face more price increases as rolling blackouts are expected to continue and retailers and consumer goods companies spend more on power back up, increasing the cost of doing business and therefore, exerting additional pressure on input costs.

Many higher-income households have already started investing in backup and renewable power solutions or are likely to consider these options given the recently announced tax rebate for the fiscal year 2024, which requires making certain purchasing trade-offs, as well as the Sarb’s relentless course to combat inflation with its ninth consecutive interest-rate hike at the end of March 2023.

Deloitte says the year 2023 could be a perfect storm for South Africa if various global and domestic risks materialise. Domestically, tackling wide-ranging (and often self-imposed) challenges such as weak growth, mismanagement and maladministration swiftly will be key to taking the brakes off the country’s dire growth outlook.