The downside
Third-quarter GDP figures were disappointing, with year-on-year growth remaining at less than 1% for the fifth quarter. The negative effect of sky-high interest rates is quite clear. During the first seven quarters after the initial recovery from the COVID-19 pandemic, South Africa's economy grew at an average rate of 3.5% in real terms.
During the next seven quarters, following the strange decision by the Monetary Policy Committee (MPC) of the Reserve Bank to raise the repo rate to its highest level in 14 years, the average real GDP growth rate was 0.9%. Although the rate hiking cycle has been reversed, the pace at which the repo rate has declined is extremely slow.
South Africa's real commercial lending rate is currently higher than any stable country with a middle—to high-income status. Other disconcerting news is that public sector salaries have been increasing at double-digit rates, far exceeding the increases in the private sector. Finance Minister Enoch Godongwana needs to step in to correct this trend, which is a dangerous anomaly from a productivity perspective that threatens fiscal stability.
The upside
S&P Global lifts South Africa's debt outlook
The recent uptick in the S&P Global Purchasing Managers' Index (PMI) for South Africa seems to have been a forerunner of the decision at the end of 2024 by sister company S&P Global Ratings to revise its outlook on South Africa's sovereign debt from stable to positive. The ratings agency has also upgraded Eskom's 'B' long-term global-scale foreign and local currency ratings from stable to positive.
Key findings included in the latest S&P Global PMI for South Africa, which covers the bulk of the private sector, include signs of improving demand and falling cost levels, supported by robust business confidence.
Most firms surveyed expect output to continue rising, and anecdotal comments suggest that lower interest rates, political stability, and reduced load shedding contributed to optimistic growth predictions.
The PMI has shrugged off the negative trend induced by restrictive monetary policy and has been in positive territory for four successive months. With interest rates bound to drop further in 2025, this index should sustain its upward momentum in the coming months.
Balance of payments in good shape
South Africa's external financial accounts are in excellent shape, with a surplus on the financial account of the balance of payments having returned to pre-COVID levels and 2024 guaranteed to record the ninth successive year of a trade surplus.
Producer inflation drops to below zero.
On aggregate, year-on-year price increases at the factory gate are at their lowest levels since the Reserve Bank started publishing this data in its current format (from 2009). In November, the producer price index (PPI) recorded a negative reading for the second consecutive month, confirming the need to shift the country's economic policy priority from curbing inflation to encouraging demand by lowering the cost of credit and capital investment.
Consumer prices are also in check, with the November reading of the consumer price index (CPI) remaining below the bottom of the Reserve Bank's target range for the second month running. Other reasons for the monetary policy authorities to shift the focus to stimulating economic growth include that South Africa currently has one of the world's highest accurate commercial lending rates. The actual prime rate is 8.5%, compared to actual lending rates of 3% in France, 2% in Australia, and 1.1% in Chile. Hopefully, a decline of 50 basis points in the repo rate will be forthcoming at the MPC meeting in January.
On Balance by Dr Roelof Botha deliberately emphasises positive news, which often emphasises the resilience of the South African economy and the immense scope for new business opportunities.
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