Citadel Investment Services provides a mid-year economic outlook, looking at economic activity from the past six months and economic events to come that could impact the markets in the near future.
The outcome of coalition talks over the next two weeks is likely to determine the country’s economic direction for the next few years, according to Citadel Chief Economist, Maarten Ackerman.
“We need a government that can fast-track policy and provide policy certainty, but we are unlikely to see this in the year ahead. We may see slower than usual formulation and implementation of policies, especially economic policies, as the new government of national unity (GNU) finds its feet over the next year. We’re unlikely to see any real policy support for the economy in the next year, given that the focus will be on political issues,” Ackerman says.
Speaking on the current political landscape, Ackerman explains that it remains to be seen if there will be a change in economic policy after the GNU talks are concluded. “If the GNU is pro-populist we may see a change in policy. If it tilts towards pro-business or if it is business-as-usual and we can get private sector participation to address some of the important structural issues in the economy, we can get the economy back to capacity growth. However, that is a big ‘if’.”
Commenting on the Q1-2024 gross domestic product (GDP) numbers that were announced this week, he notes that South Africa is only likely to escape its prevailing ‘per capita recession’, due to population growth continuing to outstrip economic growth, if it succeeded in achieving 1.5% GDP growth over a sustained period.
Looking back on the first quarter results of 2024
No major sectors of the economy grew since the beginning of 2024, apart from agriculture which was boosted by an increase in supply of horticultural products. Agriculture accounted for only 4% of the economy and therefore its contribution was too small to pull the rest of the economy into positive growth, says Ackerman.
Major sectors that fared the worst in the first quarter of 2024 were the construction, mining and industrial sectors, all of which were dependent on stable electricity supply, functioning ports and efficient logistics networks. The recently announced plan to include private participation in the South African rail network was “very positive news” but was only likely to start bearing fruit – in terms of resolving some of the greatest challenges of the state-run era – in the next few years. “Failing state-owned enterprises is one of the biggest issues in our economy, so involving the private sector is a factor that improves market sentiment,” he adds.
Ackerman says the major challenges that impacted the construction industry included high interest rates, that increased the cost of capital, the poor performance of the residential property market, the consolidation of major players, the havoc wrought by the construction mafia in some provinces and the poor overall performance of listed properties on the Johannesburg Stock Exchange (JSE).
Fixed investment is starting to slip
Gross fixed capital formation – the indicator of private and public sector investment into the economy – had another negative quarter in Q1-2024 after a seven-quarter positive streak, which at its tail end was boosted by the February 2023 solar power tax incentive announcement, which encouraged the private sector to invest in solar power. Ackerman further adds, “The solar boom seems to be tailing off now. Most of the private sector investment we are seeing seems to be out of necessity – do it or close shop – rather than being an indicator of investor faith in the South African economy.”
Household consumption remains under pressure
South African consumers remained under pressure, as spending on products and services dipped again to -0.3%. The last positive quarter for consumer spending was in Q1-2023, a year ago, but since then consumers have come under further economic pressure from high unemployment and rising living costs exacerbated by rising interest rates. Spending dipped on the durable goods side – with marked declines in spending on clothing and footwear – but remained stable on essential non-durable goods such as food, water, electricity, communications, health, education and household equipment. South Africans also cut discretionary spending on transport, recreation and alcohol to tighten their belts.
Managing Investment risk in volatile times
“Markets are always volatile. There is a lot of dust and political uncertainty in the current environment. Managed volatility strategies are critical now to preserve investment value. The point is that you can’t invest short-term or based on emotion around current events,” Ackerman says. He adds that investors must look through the dust and noise and invest for the long term based on solid long-term strategies that are designed to benefit from market volatility over time.
According to Ackerman, the biggest surprise of the first few months of 2024 was that despite earlier expectations, central banks around the world were reluctant to cut interest rates. Analysts expected the United States (US) Federal Reserve to implement six or seven rate cuts in the course of 2024, but none have materialised thus far, due to sticky inflation. “The US economy is starting to show early signs of a slowdown, while the rest of the world seems to be slowly coming out of an economic winter period,” he says.
“The South African Reserve Bank was always “in step with the Fed” and was unlikely to cut rates before the US did, as it would reduce our yield attractiveness and put the rand under more pressure. Geopolitical volatility was nowhere near subsiding just yet, and many countries were still facing elections and coalition talks. The major election to look out for is the US Presidential Elections in November,” he concludes.