Cloudy with a chance of interest rate cuts for South Africa

 ·5 Jun 2024

South Africa’s prospects of achieving over 1% GDP growth in 2024 appear to be diminishing after a poor start to the year, with economists hoping for a better second half.

Stats SA published Q1 2024 GDP data on Tuesday (4 June), showing a quarterly decline of 0.1%, breaking the seasonal trend of growth in the first quarter of each year.

The result was lower than market expectations of 0.1% growth for the quarter.

The first three months of 2024 were mired by increased load shedding—negatively impacting electricity production and the energy-intensive mining and manufacturing sectors—as well as strained household finances amid high interest rates.

However, while the first quarter underperformed, the suspension of load shedding for over two months starting in April has sparked some hope for better results in Q2 – but that might not be enough to turn things around.

According to economists at Nedbank, South Africa faces a year of patchy economic growth, with harsh operating conditions on the supply front persisting while domestic demand remains constrained.

Effectively, the story for 2024 will be one of two different halves.

“In the first half, high interest rates will continue to strain household finances, weighing on consumer confidence and demand. Soft demand and lower international commodity prices will undermine production across sectors on the global front,” it said.

“We expect these pressures to start easing slightly in the second half as inflation shifts down a gear and the monetary policy easing cycle begins.”

The banking group currently expects the interest rate cutting cycle to begin in September with a 25 basis point cut, followed by another 25 basis point cut in the final (November) meeting for the year.

This is because domestic inflation is forecast to shift down a gear around the middle of year, it said, enabling the South African Reserve Bank to begin cutting interest rates, “which should support real incomes and lower debt service costs, lifting consumer confidence and demand”.

Government spending is also forecast to remain positive, but growth in fixed investment is likely to fade in response to the challenging operating environment and subdued growth prospects.

Altogether, Nedbank forecasts GDP growth of around 0.9% in 2024.

This is in line with the bleak outlook from the International Monetary Fund, which slashed its growth outlook for the country to 0.9% in April, down from 1.0% in January and down to half the 1.8% projection back in October 2023.

According to the IMF, in addition to low growth, South Africa will continue to battle inflation and high unemployment this year. 

Economists at the Bureau for Economic Research are still seeing things on the upside, with GDP projections at 1.3% for 2024. The group published a commentary document on Tuesday outlining how South Africa could achieve growth of 3.5% using policy and reform plans already in place.

The South African Reserve Bank is also more optimistic, with a 1.2% estimate for the year.

FNB also said it is “cautiously optimistic” about South Africa’s prospects for the year, anticipating growth to hit 1.6% by 2026.

“Although the domestic situation remains precarious as political negotiations continue, we anticipate economic growth to rebound in the second quarter, supported by the absence of load shedding and potential boosts from election-related spending,” the bank said.

“However, the extent of the second-quarter rebound may be limited by the weakness already observed in the manufacturing PMI and new vehicle sales.

“Our cautiously optimistic growth prognosis is based on assumed improvements in electricity supply, moderating inflation, and imminent, albeit limited, interest rate cuts.”

Read: South Africa doesn’t need a miracle

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