South Africa Economic Outlook - August 2023

Good news ranges from a continued rise in employment and declining inflation to the prospects of lower interest rates and higher economic growth during 2024

Johannesburg, 30 August 2023 — PwC South Africa is pleased to share its eighth South Africa Economic Outlook report for 2023.

Currently, there are many factors causing negative consumer sentiment, including a decline in real household income and almost daily electricity load-shedding, amongst other factors. However, there is also some good macroeconomic news.

In our latest report, we make reference to the following positive factors:

• Employment is growing at a faster rate than many have expected given the elevated levels of load-shedding.
• The recent increase in and near-term planned investment in solar power is brightening the outlook for economic growth in 2024.
• Interest rates have likely peaked and it is anticipated that the next move from the central bank will be to lower lending rates during 2024.
• The decline in real (i.e. inflation-adjusted) salaries and wages is slowing as consumer price inflation continues to trend lower.
• Environmentally-aware consumers are willing to pay above the average price for goods that have a positive environmental impact.

South African employment increased by 784,000 jobs (5.0%) in the year ending 2023Q2. This substantial increase in employment contrasts with weak economic growth due to, amongst other factors, electricity load-shedding and supply chain disruptions. The strong increase in jobs over the past year is encouraging and reflects a growing resilience on the part of private business against the negative impacts of electricity outages.

Operation Vulindlela is tracking a pipeline of 10,000 MW in private sector energy generation projects. The positive impact that this will have on the power supply in the country and on individual business operations makes for a more positive economic growth outlook for 2024 and beyond. We expect the economy to grow by 1.0% next year, or as high as 1.3% under an upside scenario.

On the monetary policy front, we believe the repo rate has likely peaked alongside a decline in consumer price inflation. Another key metric we are monitoring is the real repo rate, i.e. the inflation-adjusted return provided by domestic interest rates. The South African Revenue Service (SARB) expects the real repo rate to increase from -1.4% in 2022 to 2.7% this year and 3.0% in 2024. This is above the SARB’s view of a steady state neutral real interest rate of 2.5%. In other words, the trends in both the nominal repo rate and inflation point to an on-goal real repo rate in the near future.

Lullu Krugel, PwC South Africa Chief Economist, says:

“The next step in the interest rate cycle will then most likely be a reduction in the repo rate as inflation abates further. We believe this is likely to start around the middle of next year pending — as the SARB has often said — favourable data and risk developments. We do not anticipate  interest rates to come down again to the low levels seen in 2020. Instead, it is likely that two percentage points could be shaved off towards the end of 2025. That would bring the repo rate back to pre-pandemic levels and support household spending.”

Salaries and wages in South Africa increased on average by 4.0% in 2022 compared to an average inflation rate of 6.9%. This translates into a 2.9% decline in real (i.e. inflation-adjusted) income, meaning a 2.9% decline in household buying power. In 2023, we expect a 5.2% increase in salaries and wages compared to an average inflation rate forecast at 6.0%. As such, the slowdown in inflation will help ease the decline in consumer buying power.

Christie Viljoen, PwC South Africa Senior Economist, says:

“In the current economic climate, South African companies are struggling to pay higher remuneration to their employees. As such, consumer buying power will again decline this year, albeit by a smaller margin compared to 2022. We expect salaries and wages to increase by 5.2% this year versus an average inflation rate of 6.0%. This results in a 0.8 percentage point decline in the real value of salaries and wages, compared to a 2.9 percentage point decline in 2022.”

Nonetheless, while we have highlighted some good news in this report, for consumer-facing companies, these are still trying times. They are being challenged to reduce input and output costs while delivering effective and efficient customer services.​ Our forthcoming blog, To win in consumer goods, start with your customer (and technology), notes that the C-suite is looking to build consumer lifecycle loyalty while mitigating the negative effects of a myriad of macroeconomic factors.

Riaan Singh, PwC South Africa Head of Experience Consulting, says:

“While retail spending is under pressure from deteriorating personal financial circumstances associated with tough macroeconomic conditions, these headwinds also provide opportunities to drive customer loyalty like never before. Consumer-facing companies must prioritise efforts to better understand younger and more economically diverse groups, as recognising their needs and preferences can provide opportunities to grow their loyalty.”

PwC’s Global Consumer Insights Survey (GCIS) Pulse 6 (published in June 2023) notes that South African consumers are willing to pay more for sustainably produced goods. Overall, eight out of ten consumers in our survey — based on a sample of mostly employed South Africans — say that they would pay more. In fact, they are willing to pay 10% above the average prices for goods that have a lower carbon footprint and are biodegradable. This willingness to pay above the average price is a key insight about consumers’ orientation towards environmental issues in a context of constrained household finances. Also, three-quarters of South Africans in our survey sample earn less than R400,000 per year, suggesting that environmental consciousness is not just important for the affluent.

Key content in this report includes:

• Employment creation: Jobs continue to rise as businesses show increasing resilience against electricity challenges.
• State of the South African consumer: Cloudy with a chance of interest rate cuts.
• Consumer sentiment: Shoppers respond favourably to special offers as their buying power continues to decline.
• Sustainability trends: Consumers are willing to pay more for goods that have a positive environmental impact.
• Technology focus: Shoppers demand a seamless phygital customer experience (CX).
• How PwC can help to improve customer service delivery, including CX, marketing diagnostics, and building trust with consumers.