Why South Africa is falling short
South Africa’s economic growth was disappointing in the third quarter (Q3) of 2024, recording a contraction of 0.3%.
This was a significant deviation from the anticipated 0.5% growth projected by the South African Reserve Bank (SARB) and the Reuters median consensus.
Sanisha Packirisamy, Chief Economist at Momentum Investments Group, said that this lacklustre performance can be attributed to a confluence of domestic and global factors and has prompted economists to adopt a cautious outlook for the remainder of the year and beyond.
What held Q3 GDP back
Agriculture, the backbone of many economies, experienced a sharp decline, contracting by a staggering 28.8% in the third quarter.
This downturn, primarily driven by lower field crop production, shaved off 0.7 percentage points from overall economic growth.
The El Niño weather pattern, which brought about a significant decrease in rainfall, played a major role in this decline, resulting in a 25.2% year-on-year reduction in summer crop yields.
While the winter crop harvest is underway and expected to partially offset the losses, the overall impact on agricultural output remains substantial.
The Agriculture Business Chamber of South Africa (Agbiz) notes that “SA is in a relatively good place regarding wheat supplies this new marketing year” due to large imports in the previous season.
Packirisamy said that compounding these challenges is a worsening water crisis, particularly affecting Gauteng, the country’s economic powerhouse.
She said that while the direct impact on sectors with low water usage, such as manufacturing and finance, may be minimal, the indirect consequences on consumer confidence, tourism, and the healthcare system could be far-reaching.
The water crisis also threatens to disproportionately burden municipalities, potentially fueling social unrest and further undermining economic stability.
Declining exports also impacted the GDP performance.
Exports decreased by 3.7% quarter-on-quarter, resulting in a 1 percentage point reduction in GDP growth. This was the second largest factor contributing to the negative GDP growth in Q3 2024.
While declining exports negatively impacted growth, this was partially offset by a 3.9% decrease in imports, which contributed 1.1 percentage points to GDP growth.
Cautious optimism
Packirisamy explained that on a positive note, the electricity availability factor (EAF) has shown consistent improvement, remaining above 60% for two consecutive quarters, a trend not observed in recent years.
This improved energy stability has mitigated the adverse effects of load shedding, a persistent challenge to South African businesses and industries.
“While the benefit of no load shedding is taking longer to transpire, we are not expecting the electricity supply to play a detracting role from economic activity in the near term,” said Packirisamy.
The Momentum Investments Chief Economist said that global economic uncertainties further cloud South Africa’s prospects.
The International Monetary Fund (IMF) projects South Africa’s economic growth to reach 1.8% by the end of the decade but cautioned about downside risks stemming from geoeconomic fragmentation, protectionist policies, and a potential slowdown in key trading partners.
She said that these global headwinds could trigger exchange rate volatility, commodity price fluctuations, and capital flow disruptions, all of which could dampen investor confidence and hinder South Africa’s export-driven growth.
Domestically, the impact of the recently implemented two-pot pension system remains under scrutiny.
While the initial uptake of this reform was slow, with R4.1 billion withdrawn in the first few days, the momentum has picked up considerably, reaching R35.1 billion by November 19th.
The SARB has consequently revised its estimate of total withdrawals for 2024 from R40 billion to R51 billion, suggesting a potential boost to consumer spending in the fourth quarter.
However, Packirisamy said the extent to which these withdrawals will translate into sustained economic growth remains to be seen.
Silver lining amid uncertainty
Despite the prevailing challenges, Packirisamy said that there are glimmers of hope.
She said that ongoing structural reforms aimed at improving the business environment and attracting foreign investment could pave the way for more robust growth in the medium to long term.
The IMF acknowledges the potential of these reforms, noting that faster implementation or stronger global growth could lead to a more optimistic outlook.
However, she noted that the immediate future remains uncertain because the significant contraction in the third quarter, coupled with persistent domestic challenges and a volatile global landscape, warrants a cautious approach.
Packirisamy said that whether South Africa can navigate these headwinds and achieve its growth potential will depend on a combination of factors, including the effectiveness of policy interventions, the pace of structural reforms, and the trajectory of the global economy.
“Overall, we still expect economic growth to recover from 0.7% in 2023 but remain lacklustre at around 1% in 2024 (with the potential of a downside surprise) before rebounding to an expected 1.8% in 2025,” she added.
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