Financial services firm Absa notes in its 'Quarterly Perspectives' report for the fourth quarter of this year that it expects South Africa to record a second consecutive quarterly gross domestic product (GDP) contraction of 0.4% quarter-on-quarter (q/q) in the third quarter of 2022.

This, technically, would make it a recession, Absa Research economist and team leader Peter Worthington said during a briefing on October 31.

He noted, however, that the Absa team expected the country's GDP to grow by 0.7% q/q in the fourth quarter, which would make the annual rate of growth this year 1.6%.

GDP growth is expected to slow further to 1.1% in 2023, before improving to about 1.8% once the electricity constraint starts to ease in 2024.

"Growth prospects are constrained by domestic and international factors. Domestic factors include higher interest rates that will increase debt servicing costs and weigh on disposable income and consumption. We expect consumer spending will increase by only 0.8% in 2023," Worthington said.

Further, there are significant problems for growth and exports from various transport and logistical challenges, such as port and rail constraints.

The risks to the growth forecast seem tilted to the downside, given the significant risk of adverse domestic or international shocks.

"Even in the absence of such shocks, trend growth is unlikely to accelerate much beyond 2% until South Africa makes much faster and more comprehensive progress on a range of reform fronts, including strengthening the capacity of the State, especially at the municipal level, and professionalising the civil service overall.

"Other reforms include overhauling the Department of Mineral Resources and Energy to facilitate growth of mining, improving skills development and changing the labour relations framework in a direction that ties wage increases to productivity gains," Absa Research said.

Further, the report indicates multiple headwinds for South African exports, including weaker global demand, falling iron-ore and potentially other commodity prices, and domestic supply constraints, including intense loadshedding and persistent issues at State-owned Transnet, which are especially inimical to exports and growth.

"Meanwhile, the import bill is likely to be boosted by improving gross domestic expenditure, a still-elevated Brent crude oil price and big imports of renewables related capital goods.

"We believe that, heading into 2023, South Africa’s robust terms of trade could soften further as the global economy slows. We have consequently revised our current account forecast for 2022 as a whole down to a deficit of 0.3% of GDP, and have now pencilled in a larger deficit of 1% in 2023," said Absa Research economist and inflation specialist Miyelani Maluleke.

INVESTMENT AND INFLATION
Meanwhile, business sentiment would remain weak, constraining private capital expenditure outside of the renewable energy space. Manufacturers in particular remain gloomy about future investment.

"In our view, a lot more structural and microeconomic reforms to rehabilitate supporting infrastructure and improve the operating environment for businesses are needed to secure a big investment boom," the team said in the report.

The team forecasted fixed investment spending growth of 2.9% in 2023 and 3.4% in 2024.

Further, while food and fuel inflation are expected to ease during 2023, strong inflationary base effects remain in place, offsetting the fall in food and fuel inflation.

"We expect inflation will remain high for a bit longer, and higher inflation and inflation expectations indicate that we could see core consumer price inflation (CPI) trend higher. However, we think inflation will continue to ease and expect headline inflation to fall below 6% in May next year, leading to an average 5.3% inflation in 2023 compared to 6.8% average in 2022," said Maluleke.

The Absa Research team expected the main local drivers of inflation in the medium- to long-term to be exchange rate developments, unit labour cost trends, inflation expectations and the degree of slack in the economy, or the output gap, against its growth potential.

"However, an additional and highly uncertain factor at the moment is the impact of the rampaging global inflation dynamic on South Africa. Major advanced economies around the world may be entering a new era of persistent and structurally higher inflation. At least some of this price pressure could likely spill over into South Africa," he noted.

Overall, despite lower oil and food price inflation globally in recent months, the balance of domestic factors and international developments suggests that the risks to Absa's inflation forecasts lie on the upside.

Additionally, Absa Research expected the South African Reserve Bank (SARB) to continue its tightening and expected the SARB to hike the repo rate by another 75 basis points in November, followed by another 50-basis point hike in January, which will result in the repo rate peaking at 7.5%.

"We think the SARB will begin to cut interest rates from about the middle of 2023. We expect inflation will ease back into the target range by the middle of next year and also expect core CPI to peak, which should create the space the SARB needs to implement some gradual and modest cuts, taking the repo rate back to 6.75% by the end of 2024," said Worthington.