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Experts predict that 2024 will be a tough year globally as sluggish global economic growth is expected to slow down even further – with South Africa’s forecasted economic climate expected to be no exception as it continues to face global and domestic challenges.
This is according to the United Nations’ (UN) Department of Economic and Social Affairs World Economic Situation and Prospects report for 2024 – which has painted a dim picture for the globe’s and South Africa’s short-term economic outlook.
Globally, investment is predicted to remain weak, and the debt crisis is likely to worsen. Furthermore, escalating extreme weather and devastating conflicts are outlined by the UN to bring about uncertainty and risk to the global economy.
Focusing on Africa, the growth of the continent’s economy is expected to remain slow, with an increase from 3.3% in 2023 to 3.5% in 2024.
This is due to various factors, such as the global economic slowdown, strict monetary and fiscal policies, high levels of debt sustainability risks, the ongoing climate crisis and extreme weather events that may negatively impact agriculture and tourism, and geopolitical tensions in several African regions.
South Africa, an economic powerhouse on the continent, was referred to often throughout the report as a nation hit particularly hard by economic challenges.
Some of South Africa’s economic hurdles
According to the report, “the economic outlook for South Africa is bleak at present due to the country’s ongoing electricity crisis, exacerbated by underinvestment in renewable energy. The economy is estimated to have grown by only 0.5 per cent in 2023, and this lacklustre growth is spilling over across the region.”
The report highlighted a few of the contributing factors that could be used to explain the country’s current situation.
High unemployment and low labour force participation (particularly among youth) remain a massive challenge impeding developing countries – including South Africa, whose youth unemployment sits at over 60%.
Additionally, high levels of external debt and still-rising interest rates “are constraining developing countries’ access to financing in the international capital markets.”
The 10-year note of government bond yields is a benchmark for financial markets worldwide. An increase in yield represents the trust of investors in the economy, but it also indicates a rise in borrowing expenses, which can potentially hamper economic progress. Conversely, a decrease in yield may imply an uncertain economic outlook.
In the report’s explanation of the effects that these have, it said that “excessive borrowing in developing countries did not lead to higher levels of investment.”
“It supported domestic consumption in these countries, often leading to a higher volume of imports and worsening trade balances.”
Additionally, while domestic consumption in many developing countries (including South Africa) remained strong – investment was described as remaining weak.
A major (although not sole) contributor to investment is the growth of the total factor productivity (TFP). This key measure of economic efficiency and productivity fell over measured years. Under this, South Africa experienced a decline.
Notes: The green dashed line is at 45 degrees. Economies below the dashed line experienced a slowdown in total factor productivity growth.
Monetary tightening significantly exacerbated global financial conditions in 2022 and 2023, which increased the borrowing costs for developing countries.
For example, a few months after the United States stopped quantitative easing (a monetary policy action where a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity) in March 2022, currencies of a few developing countries, including South Africa, depreciated by over 20%.
The UN’s review noted that while South Africa’s banking sector has remained relatively stable, the country’s smaller reliance on macroprudential measures has seen “the value of the rand… [fall] from about 8 rands to the dollar in April 2012 to 18.5 rands to the dollar in April 2020, marking not only a very large depreciation but also extreme volatility in the exchange rate.”
It also noted that “net portfolio investments into South Africa fell from $20.9 billion in 2017 to -$27.8 billion in 2021, [which] underscores the need for both [capital flow management measures] and macroprudential measures to stabilize financial flows and prevent a sudden surge in outflows that can be devastating for investment and economic growth.”
Debt sustainability challenges were also outlined as key issues that continue to undermine growth prospects in Africa.
Fiscal pressure in South Africa is expected to remain high due to its high debt burden
and the maturing of Eurobonds in 2024.
Additionally, “structural vulnerabilities such as weak taxation frameworks, narrow tax bases, and inadequate institutional capacity limit the effectiveness of fiscal policy reforms” were outlined as reasons for the country’s experience in deteriorating fiscal positions, high public debt and a low domestic revenue base.
Predictions for 2024
Chief economist at Investec, Annabel Bishop, has said that South Africa’s economic growth outlook for 2024 is at 1.0% y/y – stronger than 2023’s 0.5% y/y outcome.
Bishop said that this is because 2024 expects to see the start of an interest rate-cutting cycle, as well as lower inflation on average and improvements to infrastructure.
“Economic growth will be lifted by a reduction, to planned eventual elimination, of congestion at the ports, although electricity supply is not expected to fully, and consistently, meet demand this year, and higher stages of load shedding are likely,” she said.
Speaking about the pains the electricity crisis will continue to have on the economy, Bishop said that “load shedding is likely to persist through 2024, at risk of worsening from stage 3/4 as insufficient capacity comes online, but 2025 should see more capacity from private sector generation, with further build-up over subsequent years.”
Read: The rand isn’t doing what it’s supposed to
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