This week, the South African economy surprised with a shock decline in GDP of 0.3% for the third quarter. The numbers contradicted economists’ forecasts that GDP would expand by around 0.4% for the period, with the expectation that lower energy prices, a prolonged pause on load-shedding, and confidence in the Government of National Unity (GNU) would boost growth.
The immediate question is why the economy contracted when the signs were so favourable. The easy explanation is a 28.8% collapse in agricultural output – the largest such drop in 30 years. The decrease in output is due to the impact of drought on key crops such as corn, soybeans, wheat, sunflower, and vegetables across vast swathes of South Africa. The entire value chain of agriculture contributes around 12% of South African GDP.
It is worth noting that Agri SA has asked the Bureau for Food and Agricultural Policy to review its data after the statistics showed a much deeper slump in agriculture than the industry body had foreseen. While a contraction was expected due to the drought, the scale of the fall is much higher than forecast.
Yet, even when we discount the impact of agriculture on the GDP for the quarter, the numbers appear lackluster and add to quarter upon quarter of underperformance for the South African economy. In earlier quarters, economists and government would point fingers at load-shedding as the major culprit. But GDP growth has not roared back after a largely load-shedding free year.
The recovery from load-shedding might still be feeding through into the economy. It may be the case that we will still see investment as well as consumer and business confidence recover slowly in the quarters to come, supported by improved consumer sentiment, lower inflation, and lower interest rates.
The formation of the GNU, meanwhile, had given business confidence, the rand, the JSE and the bond market a shot in the arm earlier this year. But we have now reached the stage where investors and businesses realise that repairing and reforming the economy will not be a quick fix. Concerns about corruption linger, along with skepticism that the GNU will be able to stamp out graft and implement the business-friendly reforms needed to uplift the economy.
It is our contention that the poor growth reflects an ongoing lack of confidence in the economy, paired with a slow pace of economic reform and deep structural issues. While the electricity crisis has improved thanks to a turnaround at Eskom and private investment in solar, South Africa is still dealing with massive failings in infrastructure such as roads, ports and water provision. Until this is remedied, the potential of the economy will remain constrained.
In this regard, it is worth noting that the rand and the JSE shrugged off this week’s shock GDP number, which suggests the market feels that the real performance of the economy might be stronger than the stats suggest. While the JSE had enjoyed a strong run post the formation of the GNU, outperforming the S&P 500 in rand terms by as much as 17.5% to 27 September, the performance gap between the ALSI and the US markets has closed in recent weeks, particularly since Trump’s victory, to the point where the S&P 500 is now ahead of the ALSI by more than 10% since the beginning of the year, with both performances measured in rands.
This is a return to the chasm we have seen between the performance of South African equities and the S&P 500 for more than a decade. A situation that is likely to persist if domestic growth continues to disappoint.
“Even without agriculture, GDP growth would have been sluggish – we would have been glad to hit 1% this year. The manufacturing sector has been hit with shock after shock over the last couple of years, and a few months of no load-shedding and optimism around the GNU is not enough to turn the battered sector around.”
– Bureau for Economic Research chief economist Lisette IJssel de Schepper
Global News
- US business leaders are significantly more optimistic about the economy and prospects for their own businesses after Donald Trump won the presidential election, with finance chiefs and other leaders expecting stronger growth in 2025 even as they see inflation as a risk, two surveys released this week showed. 67% of US business executives polled by the Association of International Certified Professional Accountants said they are confident about the economic outlook for the year ahead. The findings mirror those from Duke University’s Fuqua School of Business in collaboration with the Federal Reserve Banks of Atlanta and Richmond.
- Fed chairman Jerome Powell said on Wednesday that the strength of the US economy means the central bank can show some restraint with cutting interest rates. “The US economy is in very good shape, and there’s no reason for that not to continue,” Powell said at an event hosted by The New York Times. He has downplayed the prospects of tension with the incoming Trump administration. Powell’s comments come as the Fed is expected to cut interest rates later this month for the third time this year.
- US consumers spent a total of $13.3 billion on Cyber Monday, up 7.3% from the previous year, according to Adobe Analytics. Some $15.8 million every 60 seconds was spent in two hours on Monday night. Online spending on Thanksgiving Day and Black Friday were up 8.8% and 10.2% year-over-year, respectively. The company’s data projects that holiday spending from November to the end of December will surpass $240 billion, up 8.4% from the previous year. This comes even as concerns about inflation linger.
- About 45 companies have delisted from the London market this year due to mergers and acquisitions, up 10% from 2023, according to data compiled by Bloomberg. The UK stock market is shrinking at the fastest pace in more than a decade. The volume of deals targeting UK companies has jumped 81% this year to more than $160 billion. UK equities are now trading at a record discount of more than 40% to global peers, according to data compiled by Bloomberg.
- Over half of UK businesses plan to raise prices and cut jobs in response to a £26 billion tax hike on employers, risking higher inflation. The Bank of England’s survey showed that many CFOs expect to pass the costs to consumers and reduce employment. This creates a dilemma for the Bank, as short-term inflation could ease later due to lower employment. The tax hike has led to business backlash, with many considering wage cuts or profit reductions. The Bank is monitoring responses to decide on future interest rate cuts, amid persistent inflation concerns.
- French PM Michel Barnier resigned three months into his term after a historic no-confidence vote, uniting lawmakers from both sides and deepening political instability. His government is the first since 1962 to fall this way, making Barnier France’s shortest-serving prime minister. President Emmanuel Macron will appoint a successor soon, prioritising the 2025 budget.
- South Korean President Yoon Suk Yeol faces growing calls to resign after imposing the first martial law since the country’s democratic transition in the late 1980s. Six opposition parties have submitted an impeachment bill, with a vote in the National Assembly expected today. Opposition lawmakers plan to proceed with the impeachment this weekend, while police investigate allegations of treason against Yoon and his top ministers.
- Bitcoin hit $100,000 for the first time on Wednesday, driven by Donald Trump’s appointment of crypto advocate Paul Atkins to succeed Gary Gensler as head of the Securities and Exchange Commission. The cryptocurrency’s market value is nearing $2 trillion, making it larger than most public companies. A standout beneficiary is MicroStrategy, whose Bitcoin-powered 500% surge this year has positioned it as Wall Street’s top-performing trade.
- The “Magnificent Seven” stocks are a buy during corrections as most of them will keep generating money, according to Aswath Damodaran, a finance professor at NYU’s Stern School of Business, who is known for his expertise on valuations. “As a value investor, I have never seen cash machines as lucrative as these companies are,” Damodaran said in a Bloomberg Television interview. “And I don’t see the cash machine slowing down.”
- Meta Platforms is the latest company to turn to nuclear to power AI. It wants as much as 4 gigawatts of new nuclear energy as it looks for a reliable electricity source for its data centres. The Facebook parent is asking developers to submit proposals to deliver 1 gigawatt to 4 gigawatts of reactor capacity, starting in the early 2030s. Due to their high cost and long construction timelines, electric utilities have shown little interest in building reactors.
- Salesforce shares surged to a record high on Wednesday, rising 11% to $367.20 after the company reported stronger-than-expected quarterly revenue, fueling optimism about its highly anticipated AI strategy. Revenue grew 8.3% to $9.44 billion for the quarter ending in October, surpassing analysts’ average estimate of $9.35 billion, according to Bloomberg. Salesforce, known for its customer relationship management software, is integrating AI into tools designed to handle tasks like customer support and sales development autonomously.
- De Beers reduced diamond prices by over 10% on Monday, signaling a shift away from efforts to stabilize the struggling market. The industry is facing one of its longest and steepest downturns in decades, initially triggered by a post-pandemic slowdown. Inflation has further dampened consumer spending and the collapse of China’s luxury market has exacerbated the decline. Additionally, the growing popularity of lab-grown diamonds continues to pressure prices.
- As at Thursday’s close the S&P 500 was up 0.63% for the week.
Local News
- A shock 0.3% contraction in South Africa’s GDP for the third quarter of the year has stymied economists, who had expected marginal growth. This puts at risk the possibility of the country meeting the International Monetary Fund’s latest projection of 1.1% for the full year. The sharp GDP slump was mostly driven by a decline in the agricultural sector, which dropped 28.8% quarter-on-quarter. Andrew Matheny, economist at Goldman Sachs, said in a note that the downward surprise is incrementally dovish for South Africa’s rate prospects. Matheny is convinced that there will be two consecutive rate cuts at the next two meetings and a lower terminal rate at 6.50% than discounted by the market.
- South Africa’s debt levels have risen significantly, making it the 12th most indebted emerging market out of 32, up from 16th place a decade ago. This increase, driven mainly by public sector debt rising from 42% of GDP in 2014 to 75% in 2024, limits investment in critical infrastructure needed to boost business confidence and job creation. Meanwhile, the non-financial corporate sector has been cautious, reducing its debt-to-GDP ratio from 34.9% in 2014 to 32.2% in 2024, as noted by chief economist Kevin Lings in a recent analysis.
- Investor Services has affirmed South Africa’s long-term foreign and local currency debt ratings, maintaining a stable outlook. The decision highlights strengths such as effective institutions like the judiciary and central bank, a strong financial sector, and a solid external position. Moody’s noted the stable outlook reflects expectations of low economic growth, a steady government debt level around 80% of GDP, and balanced risks.
- McKinsey and Company Africa, a subsidiary of McKinsey & Company, has agreed to pay more than $122 million to resolve a US investigation into a bribery scheme in South Africa, the US justice department said yesterday. It was charged with one count of conspiracy to violate the Foreign Corrupt Practices Act for agreeing to pay bribes to officials at state-owned energy company Eskom and port and freight rail operator Transnet in exchange for non-public information about consulting contracts.
- Ninety One says the country’s energy crisis of the past two years accounted for 75% of the rand’s weakness in the period, which highlights the devastating impact of load-shedding on the economy. Ninety One, which manages almost R3 trillion worth of assets, said in a note to clients that the local currency’s recovery this year was largely helped by the suspension of power cuts along with together with optimism in the wake of the formation of a market-friendly GNU.
- President Cyril Ramaphosa’s decision to move Thembi Simelane from her position as justice and constitutional development minister while retaining her in Cabinet raises questions about his political will and power, writes Stephen Grootes for Daily Maverick. This follows media reports about Simelane’s acceptance of money from Ralliom Razwinane, often referred to as a “fixer” in the VBS scandal. Simelane has swapped with Mmamoloko Kubayi and is now the minister of human settlements.
- Standard Bank, Africa’s largest bank by assets, says early data suggests that disappointingly, consumers are not cashing in their “two-pot” benefits to pay down debt as initially hoped. It said it had yet to see a material impact on its non-performing loans since the country’s largest retirement reform kicked off at the beginning of September. Data from the South Africa Revenue Service shows more than R35 billion has already been withdrawn from the system.
- Growthpoint Properties – South Africa’s largest primary listed REIT – is set to significantly increase its exposure to the Western Cape, largely Cape Town. Growthpoint is currently investing over R4 billion in the Western Cape, more than half of this into its flagship asset the V&A Waterfront, which it owns on a 50/50 basis with the Public Investment Corporation. The investment is being made on the back of the region performing much better than the rest of South Africa.
- Naspers and Prosus’s new CEO, Fabricio Bloisi, is bullish about China, saying the group is well positioned to continue capitalising on the large market and trends such as AI. Naspers, valued at R762 billion on the JSE, sees China as the biggest internet market in the world. Naspers reported a more than 70% rise in core headline earnings for the six months to September, mainly driven by the improved profitability of the e-commerce consolidated businesses and equity-accounted investments, particularly Tencent.
- Super Group’s share price ramped up 19.6% to R33.14 on Wednesday after it announced a plan to pay a special dividend of around R16.30 per share, should the R7.53 billion sale of its stake in Australia-based SG Fleet Group to private equity firm Pacific Equity Partners go ahead. SG Fleet provides fleet management, vehicle leasing, and salary packaging services. It employs about 1,300 staff and manages over 27,000 vehicles.
- A consortium made up of AltVest Capital, EasyEquities, 27four Investment Managers and RainFin has launched an audacious bid to buy a stake in the commercial rights of the South African Rugby Union (SARU), which includes its crown jewels, the Springboks. The bid comes as member unions are set to vote today on a proposal from US-private equity firm Ackerley Sports Group (ASG) to buy a 20% stake in SARU’s commercial rights. The ASG proposal is likely to fail due to insufficient support from the Sharks, the Blue Bulls and the Lions,
- As at the time of writing, the rand was 0.2% stronger against the dollar and the ALSI was 2.9% up for the week.
Sources: Dynasty, Business Report, BusinessLIVE, CNN, Bloomberg, Moneyweb, Wall Street Journal, News24, Daily Maverick, etc.
