On Tuesday, the South African Reserve Bank (SARB) announced that the composite leading business cycle indicator decreased for a third consecutive month by 1.0% in April, but it is not all doom and gloom as economists predict a better set of data later in the year.
The bank said that seven of the ten available component time series decreased, while the remaining three increased.
“The largest negative contributors were a narrowing of the interest rate spread and a deterioration in the RMB/BER Business Confidence Index,” the SARB said in a statement.
Business confidence in the country had deteriorated to a three-year low due to persistent load shedding and challenging economic conditions amid rising interest rates and cost pressures.
The RMB/BER Business Confidence Index (BCI), released earlier this month, declined for a fifth consecutive quarter to reach 27 index points in the second quarter of 2023, down by 9 points from 36 in the first quarter.
The composite leading business cycle indicator is a measure of early signals of turning points in business cycles.
Further data from the SARB showed that the positive contributors were accelerations in both the six-month smoothed growth rate of job advertisement space and real M1 money supply.
The SARB said that the composite coincident business cycle indicator increased by 1.0% in March 2023, largely due to an increase in the industrial production index.
Momentum Investments economist Sanisha Packirisamy said, “In our view, energy constraints, weak confidence, souring international relations and a waning global backdrop are likely to add to South Africa’s growth woes in the near term. We are anticipating flat economic growth this year before picking up to 1% in 2024 and 1.6% in 2025 as energy supply constraints alleviate. Unfortunately, these tepid growth rates indicate that unemployment will continue to remain at elevated levels in the medium term.”
“Although higher stages of load shedding are largely unavoidable in the coming weeks, the outlook into 2024 and beyond looks more optimistic against a more supportive external backdrop and higher expected electricity supply, locally,” she said.
Packirisamy said several developments were set to provide some relief on the energy front, including the completion of temporary repairs to three generation units of the Kusile power station by year-end, the introduction of an additional generation unit at Kusile and the reinstatement of the second unit at Koeberg by April 2024 as well as the return of generating unit 4 at Medupi by July 2024.
These measures were expected to reduce load shedding by approximately four stages in the latter half of next year, even accounting for potential delays in government's projected timelines. Furthermore, Meridian Economics highlighted that six projects from the fifth round of renewable energy bids should be operational by August next year, Packirisamy said.
“Additionally, Operation Vulindlela, a project office operating under the presidency to drive essential structural reforms, heralds significant progress in the energy sector after the removal of licensing thresholds for embedded generation projects. This, coupled with the streamlining of project approvals, have resulted in a pipeline of 108 energy projects with a combined capacity exceeding 10 000 MW.
“It is increasingly evident that in areas where the state's effectiveness is lacking, the private sector is stepping up to fill the void. Recent developments, such as Transnet's call for private operators to run the Durban to Johannesburg rail corridor on a long-term lease and plans to appoint an infrastructure manager to facilitate private companies running trains on key freight tracks, are yet further examples of the door creaking open to private sector participation,” Packirisamy told Business Report.
Frank Blackmore, the lead economist at KPMG, said, “While we declined a little from May 2021 to the current level, we are still 10% above the pre-Covid phase. The reason for the decline is that the expected economic growth and strengthening of the economy have not taken place, with load shedding plus the deterioration of infrastructure, and the high-interest rate environment, are contributing towards the pessimism around this indicator.’’
Annabel Bishop, the chief economist at Investec said that the data was likely to improve later in the year.
Bishop told Business Report, “The leading indicator data is not seasonally adjusted, meaning that for the second quarter of 2023, the GDP (gross domestic product) growth rate will be different to -2.6% q/q contraction. The leading indicator provides an indication, but is not an actual GDP forecast.”
“Worsening stages of load shedding occurred earlier in the quarter, but load shedding stages fell from June, partly as wind power generation picked up while planned maintenance has been cut to the bare minimum and winter weather, in general, is preferential for coal-powered stations,” she said.
Bishop said higher interest rates had had a suppressive effect on consumer expenditure, but Investec expected no further interest rate increases going forward, either in the US or in South Africa in the current cycle.
“With two more months to go, the quarter is not out of the woods, but various April economic readings show some resilience. However, the self-generation of electricity does come at a high cost, and has not come through fully into the economy yet,” Bishop went on to say.
BUSINESS REPORT