Recession warning for South Africa: FNB

 ·17 Apr 2024

Economists at FNB have cautioned that if the South African Reserve Bank (SARB) maintains its high interest rates beyond what is necessary, the country could experience a technical recession.

In the latest edition of their Economic Weekly, FNB economists highlighted that South African consumers are facing mounting financial stress due to the SARB’s high interest rates.

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has increased interest rates by 475 basis points since the beginning of the current hiking cycle.

During the Covid-19 pandemic, the MPC had lowered interest rates to provide relief to households, but they began to raise rates in November 2021 due to rising inflation.

Since then, the SARB has raised the repo rate to 8.25% and the prime lending rate to 11.75%. However, despite the high interest rates, inflation has remained stubbornly high, reaching 5.6% in February before slowing to 5.3% in March.

However, in 2023, it averaged 5.9%, surpassing wage income growth of 5.6%.

According to FNB’s economists, demand, particularly for interest rate-sensitive spending, has weakened, indicating consumer strain.

They explained South Africa’s economy is grappling with a very challenging environment with low economic growth, and consumers are bearing the brunt of the tight financial conditions. 

Household consumption expenditure grew sluggishly at 0.7% last year, a significant decrease from the 2.5% growth rate observed in 2022.

The economists attribute this to a mild technical recession between the second and third quarters of 2023.

They also noted that the restrictive financial conditions have led to a continued decline in inflation-adjusted credit growth.

Additionally, the rand has weakened, the inflation-adjusted JSE All Share index has sharply dipped, and real residential property price growth has sustained.

FNB warned that although inflation may have peaked, it is still not fully under control, and there are still potential risks; therefore, the Reserve Bank should exercise caution when considering interest rate cuts, warned FNB.

FNB said that prolonging rate cuts beyond when high rates are necessary could further stifle growth and heighten the likelihood of a technical recession.

This is particularly true when broader financial conditions in South Africa are already restrictive. They said the US Fed rate has a big impact on financial conditions worldwide.

However, the economists noted that the financial conditions and consumer perspectives in the US significantly differ from those in South Africa.

Therefore, the MPC needs to consider initiating rate cuts despite the risks associated with the fiscal environment and inflation, as these risks could mean further delays and restrict household consumption expenditure for longer.

Read: Big trouble for interest rate cuts in South Africa

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