ROELOF BOTHA AND DARYL SWANEPOEL: Growth drivers coming to the fore

Piecemeal economic news and data will forever be characterised by the motions of a pendulum. Not long ago, the IMF was predicting a growth rate of 1.8% for SA in 2024, but this has now been lowered to only 1%. 

In December, the Absa/BER purchasing managers’ index (PMI) rebounded to above the neutral 50-mark, but then fell back to 43.6 index points in January (traditionally a poor month for productivity due to summer holidays).

During December, emerging market currencies took revenge on the dollar, with the rand the top performer, strengthening 3%. A mere 30 days later a marginal recovery of the US 10-year bond yield proved to be enough for the umpteenth switch to a (temporary) risk-off sentiment among fund managers, taking its toll on every global currency of note except the Indian rupee. 

The list of contradictions flowing from short-term economic data goes on and on. To provide a more informed view of prospects for the SA economy over the next 12 months it is necessary to highlight a number of potential growth drivers that emerged recently, some of whom may generate momentum as the year progresses.

Inflation under control 

First and foremost is the moderation of price pressures for consumers and producers. The December reading of Stats SA’s consumer price index (CPI) sees consumer inflation down at 5.1% from 5.5% in November and 5.9% in October. 

The producer price index, which acts as a leading indicator for consumer prices, also resumed a clear downward path, with the December reading of 4% suggesting inflation will continue to fall in 2024 — good news for consumers and prospects for lower interest rates. 

Closer scrutiny of the latest CPI data confirms the moderation of food price increases which, next to electricity, were the main reason for the recent stubbornness of the CPI’s downward trend. Food and nonalcoholic beverages constitute more than 17% of the CPI weighting, and any meaningful change in their price trends inevitably affects the CPI. 

According to the Agricultural Business Chamber (Agbiz), prospects for further declines in food prices are good. Despite the present El Niño phenomenon, SA weather conditions continue to be favourable for agriculture. Farmers have planted most of the intended 4.5-million hectares of summer crops, and good yields are expected in most regions. 

Declining bond yield 

Other good news for the millions of households with credit facilities (especially homeowners) is the welcome decline in SA’s long-term bond yield, which could be indicative of an imminent turning point for mortgage bond rates. Since early October last year the 10-year bond yield has shed more than 130 basis points — a clear indication that international capital markets are pricing in a lower interest-rate scenario for SA in 2024.

Hopefully, the Reserve Bank monetary policy committee will take its foot off the brake soon and lower the cost of credit, which will undoubtedly stimulate capital formation and private consumption expenditure. After all, there is no sign whatever of demand inflation in the SA economy.

It is important to note that the economy managed to create 2.2-million jobs over the past seven quarters, when an overly restrictive monetary policy stance led to the highest interest rates in 14 years. Once the Bank starts to also consider the second part of its policy mission — to encourage economic growth and employment creation, which require lower interest rates — new job creation should start up again and gain momentum. 

Balance of payments stability 

According to trade statistics compiled by the SA Revenue Service, a trade surplus was generated in 2023 for the eighth year running, spearheaded by a sterling performance for exports of base metals, agriculture and food, and vehicles and spares. This performance is especially noteworthy against the background of weak prices for many export commodities and the huge oil import bill. 

Gross foreign direct investment has also been forthcoming, with the average quarterly inflow rising from R9.4bn in 2021 (excluding the Naspers share swap transaction) to R26bn in 2022 and R32.4bn during the first three quarters of 2023. 

Capital formation back on track 

Capital formation seems to have turned the corner decisively after the debilitating effects of state capture and the Covid pandemic. Not only does this key demand-side indicator add value to the economy during the implementation stages, it also facilitates future growth by virtue of expanding productive capacity in all sectors. At a level of more than R270bn during the third quarter, gross fixed capital formation was 6% higher than a year ago (in real terms), and was boosted by new investment in machinery and equipment.

Sufficient imports of machinery and equipment (as experienced last year) are a prerequisite for economic growth, particularly in a developing country. In 2023, imports of machinery and equipment rose dramatically to a level of R465bn, representing almost a quarter of total imports, its highest share since 2016. The stellar performance of machinery & equipment imports is also closely associated with higher investment in renewable energy, by small and large businesses alike. 

Renewable energy transition 

Herein lies another key growth driver, which is bound to last well into the future. Unfortunately, decisionmakers and the public in general often view energy adaptation policies as endangering existing occupations, despite the facts proving otherwise. The gradual transition towards renewable energy through policy initiatives, supportive infrastructure and financing mechanisms invariably fosters innovation and creates new jobs in a variety of sectors.

Most authoritative global simulations of the effects on labour markets of a transition to lower-carbon energy point to a net positive effect, due mainly to new jobs in the full spectrum of skills. Engineering and project management are heavily involved in rolling out renewable energy technologies, while labour-intensive sectors such as construction also play an important role in building the required infrastructure. In 2023, about 14.8-million people worked in the global manufacture, installation and operation of renewable energy power, heat generation and biofuel facilities. 

Against this background, and from a relatively low base, GDP growth of about 2% in 2024 seems realistic, indicating that the economic pendulum is starting to swing back into positive territory. 

• Dr Botha is economic adviser to the Optimum Investment Group, and Swanepoel CEO of the Inclusive Society Institute. This article draws on the content of the institute’s broader prognosis on the SA economic outlook for 2024.