September saw the South African economy remain entrenched in its longest downward cycle since 1945. The world’s 32nd largest economy entered the 70th month of a weakening cycle in September, adding to already mounting pressure on the South African government to enact reforms to boost business confidence and fuel growth. Meanwhile, economic growth and business confidence are at multi-year lows whilst manufacturing sector sentiment shows a worrying contraction.
Although South Africa has avoided a technical recession after economic growth rebounded in the second quarter, up 3.1%, and 0.9% for the year to June 2019, questions are still being asked as to the economic health of Africa’s most industrialized nation.
The South African economy has failed to expand by more than 2% since 2013. Going forward doesn’t look much better either. The Reserve Bank of South Africa forecast that the country won’t meet the 2% mark by well into 2021. The central bank’s projected 0.6% expansion would make 2019 the slowest full-year expansion since 2016.
The unemployment rate of 29% is harming outside investment. Business confidence plummeted to its lowest level in over three decades in August as rising national debt figures continue to impact the South African economy.
However, there are some signs of hope. The National Treasury published a policy paper at the end of August proposing a series of steps aimed at increasing the average economic growth rate by 2.3 percentage points whilst also creating over a million jobs in the course of a decade.
The mining sector, so important to the South African economy posted a strong second quarter of 2019. The mining industry saw 14.4% growth in Q2, underpinning a stabilized South African economy.
Manufacturing also saw growth in the second quarter, posting a 2.1% increase at a time when the manufacturing sector remains under strong pressure.
Private expenditure grew in the second quarter too. Despite high fuel prices, low social grant increases, raised VAT rates and high unemployment, consumer spending rose 2.8% in Q2 – a strong indication that South African consumers are financially more confident to spend money.
In the forex markets, the Rand hasn’t fared so well. The USD/ZAR has steadily risen from the 2018 low of 11.57094 reached in February to todays near 15 ZAR as a number of international factors weigh in on the South African Rand in the fx markets. Professional forex traders have tended to follow international trends as market sentiment towards the ZAR has been eroded by global growth slowdown amid a broader emerging-market selloff.
Looking ahead, a weaker Rand in the forex markets could increase direct foreign investment. In order for that to happen, government regulatory efficiency needs to improve considerably to make doing business in SA a lot easier. The implementation of important reforms such as those proposed in August may prove to be key to South African growth prospects. However, several members of the ruling African National Congress’s alliance partners already rejected the policy which highlights just how essential political stability and unity, are to South Africa’s success.
