There is not a lot of good news for the South African economy over the next few years as the country battles energy and logistics constraints.
An economist has warned that the global and local economy is heading into a proverbial winter season in 2024, although it should be milder than the economic downturn during the Covid-19 pandemic. It will be followed by a rebound in economic growth from 2025.
Maarten Ackerman, chief economist at Citadel, says winter is coming next year, but South Africa can return to trend growth by 2025 if the private sector remains invested in the country and government avoids a debt spiral. He was speaking at Citadel’s annual client presentation.
“To know what the weather is going to be like, you must get information on the temperature and rainfall. The same applies to the economic weather outlook. You can define the economic weather outlook based on inflation and growth trends in the economy.”
He says using inflation and growth, four economic seasons can be identified, from depression (winter) to deflation, stagflation and a goldilocks scenario (summer).
“Most economic indicators suggest that the global economy should slow down further going into 2024 and move into a winter cycle before spring arrives in 2025. Germany is already in a recession and the United States is heading that way. South Africa is no different and given the local structural issues, our economy should experience a colder economic winter compared to many other parts of the world.”
Ackerman said South Africa’s economy was underperforming due to structural factors, such as unreliable electricity supply and the dysfunction of the country’s rail systems and ports which hampers exports.
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How to turn economic winter into economic spring
“How do we turn winter into spring? We need the private sector to invest in the economy. Fixed capital formation as a percentage of gross domestic product declined from almost 20% in 2012 to less than 13% in 2021. Since then, we have seen seven positive quarters, showing that the willingness of companies to invest is returning. This is the first step to rebuilding capacity in the economy.”
He emphasised that it is critical for the private sector to remain both financially and emotionally invested in the country – in other words not losing faith in the country and if it did, it could help the country enter an economic spring by 2025.
Ackerman also mentioned that South Africa is lagging its peer group and would continue to do so until government fixed the country’s structural issues. Only consistent investment over time could bring the country back to a stronger economic position.
“With winter coming, it is probably best to have some dry wood in the form of cash and bonds in your portfolio, but the risk-reward is getting less rewarding when it comes to equities. South African equities still offer some opportunities, as well as certain global regions. Keeping quality equity exposure will benefit portfolios as market conditions improve.”
He also pointed out that the world saw a massive increase in inflation after the pandemic, which was exacerbated by the Russia-Ukraine war.
“Central banks around the world tackled the problem by raising interest rates quickly to much higher levels. Given the stickiness in inflation locally and abroad, investors should prepare that interest rates will remain higher for longer.”
Ackerman predicts that we will probably remain stuck in a stagflation scenario over the next few years, where we will struggle to get growth going and inflation will remain sticky.
“During this winter period the world will also face some further geopolitical cold fronts. Over the past couple of months, the chess game between West and East intensified. At the Brics summit six new countries joined to counter the G20. Recent developments in the Middle East will add to this uncertainty and will cause more volatility.”
