The Outlook for the South African Economy Over the Next 12 Months

By: Siyanda Pali

First published: 10 November 2015

The South African economy received a downward revision by the South African Reserve Bank earlier this year of 2.2% economic growth for 2015 from a previous 2.5% projection. The SARB has also cut the 2016 outlook to 2.4% from 2.9%. This has also been met with a 25 basis point increase in the repo rate from 5.75% to 6.00% on 24 July 2015 due to, amongst other things, sustained Rand weakness. The South African economy, as well as other emerging market economies, is currently under a fair amount of pressure due to a few but significant micro and macroeconomic challenges.

On 27 July 2015, global markets felt a Chinese induced Monsoon as the Shanghai Composite Index fell by a whopping 8.5% to 3725.56 points as the fundamentals of China’s economy were tested, leading to the index’s sharpest daily drop since 27 February 2007. The Chinese government intervened in a bid to try to restore confidence in the world’s second largest economy, eventually raising margin requirements for the CSI 500 Index and devaluing the Yuan. With 43% of the Chinese stock market frozen on the day, one has seen massive volatility as numerous economies; especially mineral rich emerging market economies dependent on a prosperous China stood in a precarious position. According to the Chamber of Mines, Mining is responsible for the creation of 1 million direct and indirect jobs, accounts for 20% of investment in South Africa and constitutes some 18% of direct and indirect GDP. JSE listed companies such as Kumba Iron Ore, Anglo American and Lonmin have reached record lows on the JSE as prices for metals such as platinum slumped to $988 US/oz on 14 August 2015. Lonmin in particular fell by a massive 20% on 19 August 2015 due to debt financing concerns. A strong US Dollar, a commodity supply glut and weak manufacturing data present a conundrum for economies such as South Africa.

One of the most persistent challenges facing the South African economy is the three-prong challenge of poverty, inequality and a high unemployment rate, which, according to the Quarterly Labour Force Survey for the 3rd quarter of 2015 shows that first quarter 2015 data was at 26.4%, second quarter 2015 data at 25% and the third quarter rate rose slightly to 25.5%. The results of the 3rd quarter 2015 QLFS show that 21.2 million people constitute the labour force, with 15.8 million employed, 5.4 million unemployed and approximately 15 million people not economically active.

Furthermore, at the core of the negative sentiment which bogged down South Africa were the frequent, scheduled power outages. Loadshedding, a process of rationed power outages implemented by the nation’s power utility, Eskom, in order to deal with excess demand which outstripped supply has negative outcomes for most businesses, which have decreased production capacity if alternative sources of power are unavailable. Some of the hardest hit industries include manufacturing and mining, which form the backbone of the South African economy.

Another pertinent challenge to be tackled is a looming water crisis. The worst drought in 20 years has rendered 3 provinces disaster areas, namely the Free State, Kwa Zulu Natal and Limpopo. With approximately 2.5 million households in Limpopo, North West, KZN and Free State affected, the seriousness of the issue cannot be ignored as not only industry at large may be affected, but also human consumption. Water shedding nationally may soon become a reality while the Department of Water and Sanitation intervenes to dampen the impact of the status quo.

South Africa is heavily dependent on strong Mining and Manufacturing sector output for growth. However, according to the Bureau for Economic Research, the seasonally adjusted Barclays Purchasing Managers Index fell to 48.1 index points in October 2015 from a previous 49.9 points in September 2015, marking the 3rd successive month in which the index hasn’t managed to surpass the 50 point index mark, a clear sign that due to weaker demand, South Africa’s manufacturing sector is currently in a downswing. This trend has also been replicated by the FNB/BER Building Confidence Index which fell below 50 points in Q3 of 2015 to 44 from a previous 53 points, while the FNB/BER Construction Confidence Index also declined to 39 points from a previous 44. Not all is lost though, as the FNB/BER Consumer Confidence Index has risen from -14 index points in Q2 of 2015 to -5 in Q3, an indicator that consumers are proceeding with caution as far as buying durable goods is concerned.

The South African economy is characterised as having some of Africa’s best road and air infrastructure as well as possessing the world’s most well-regulated stock exchange. However, growth in the future may be stifled if current challenges are not met with decisive leadership. It is clear that the pace of beneficiation can no longer be delayed. Coupled with a well-diversified scope of sectors driven on the backdrop of accessible funding for entrepreneurs and highly skilled human capital ready to compete on a global scale in the knowledge economy, more optimal growth rates are possible.