Things are looking up for South Africa – but mind the elections

Leading indicators for South Africa are pointing to the second and third quarters of the year showing positive growth, says Investec chief economist Annabel Bishop.

But with a hotly contested election ahead where the results could be a gamechanger for the country taking place in May, risks are still on the horizon that could upset market forecasts.

Leading indicators do not describe current conditions but instead future points, particularly turning points, in economic cycles.

They are used by central banks, investors and businesses to predict changes in the economy based on data from various indices (purchasing managers, consumer confidence), company results and jobs numbers, among others.

According to Bishop, South Africa’s leading indicator signalled the contraction in GDP in Q3.23 ahead of time and the weak growth outcome in Q1.23.

However, it is not fool-proof and can also over/under-signal the scale of change in activity or get the direction wrong – as in Q2.23 and Q4.23.

Thus the indicator only proved relatively accurate two out of four times in 2023.

Looking ahead at 2024, the indicators are pointing to economic growth in the second and third quarters of the year, and a decline in the fourth quarter.

Overall, this puts South Africa on track for annual GDP growth of 1.0% for the year, Bishop noted, with 2025 and 2026 pushing towards 2.0%.

The growth trajectory is largely based on the government’s progress in dealing with South Africa’s infrastructure crises and reform in the freight (Transnet) and electricity (Eskom) sectors.

“This includes continuing to crowd-in private sector operators into the previously state monopolies at the ports, on the railway systems and in the electricity sector,” she said.

Of course, this more positive outlook assumes that these government plans remain in place and nothing comes along to disrupt them. Unfortunately, South Africa faces a particularly uncertain election in May 2024 which could do exactly that.

The picture of South Africa after the 2024 elections is less clear than ever before, with polls pointing to the governing ANC losing its outright majority for the first time in South Africa’s democratic history.

This has led to speculation around who the party will team up with post-elections to maintain its driving position in government, with markets fearful of a coalition between the ANC and the EFF – which is heavily anti-private sector, with an extreme left-wing manifesto that steers away from public-private partnerships in favour of nationalisation.

Positively (for markets), Bishop noted that the ANC has shown less appetite for a coalition with the EFF “after negative developments in municipal level coalitions”, “.

This has left most expecting the ANC to team up with smaller parties – including the IFP – or forming part of the multiparty coalition.

The latter option already excludes the EFF, which strengthens economic growth outlooks, Bishop said.

Read: South African voters to receive three ballots in the 2024 election – what you need to know