Triple blow to South Africa this week


South Africa’s economy will face severe headwinds in the coming weeks as taxes intensify, unions threaten to shut down industries and the Reserve Bank is poised to raise interest rates.

The country is gearing up for what could be unprecedented levels of load shedding this week after failures at numerous power plants forced Eskom electricity company to implement phase 6 load shedding this weekend.

Economists from the Bureau of Economic Research (BER) said in a note Monday (Sept. 19) that the power outages, along with taking about 7,200 MW of planned maintenance capacity offline, means half of Eskom’s total generation capacity was offline.

“While a number of coal-fired power plants are expected to be back online within a day or two, the rest of the week there will probably be a lot of load shedding,” it said.

As the second quarter GDP data showed, the impact of tax shedding on the economy is devastating. The BER added that this current round of blackouts is likely to do the same to third-quarter output.

“The intensity of the current outages threatens GDP recovery after the 0.7% qoq contraction in 2022Q2. It also serves as another reminder of the urgency to accelerate power generation in the private sector, including securing funding for it,” the agency said.

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But this is not the only thing that threatens the country’s economic prospects.

The National Union of Metalworkers or SA (Numsa) has announced that it expects a strike certificate to be issued this weekthe BER said, which will have a huge impact on the automotive sector if it continues.

Numsa is demanding a 12% pay increase from automotive employers who have offered increases of between 3% and 4%.

“The date of the strike has not been confirmed. In the meantime, however, members would mobilize across the country for a total shutdown of the auto sector,” the BER said.

Strikes against wages are a major pressure point for the economy as rising wage demand pushes interest rates up.

Markets, economists and analysts will be looking to central banks this week for the next rate moves – and the South African Reserve Bank is expected to follow the global trend by raising rates again.

Expectations are for a 75 basis point rate hike on Thursday – although the BER said it wouldn’t be surprising if a 100 basis point move is mentioned by the Monetary Policy Committee (MPC).

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“Along with the majority of forecasters in the pre-meeting polls held last week, we expect a 75 basis point move through the SARB MPC. The continued aggressive monetary policy stance of advanced central banks, especially the Fed and the European Central Bank, is an important reason why we expect the SARB to continue with a more aggressive stance,” the report said.

“In addition, since the last meeting of the MPC in July, there has been confirmation of increasing domestic wage pressures. With this in mind, another 75 basis point increase seems warranted. In fact, we wouldn’t be surprised if at this week’s meeting we again see at least one MPC member in favor of a 100 bps move.”

Higher interest rates will put pressure on indebted households.

Silver lining?

While the local economy is expected to struggle in the near term, the BER said there are some bright spots.

South African consumer inflation data for August is expected on Wednesday (September 21) and economists expect the figure to be slightly lower than before.

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After rising to 7.8% yoy in July, the BER expects annual headline CPI inflation to moderate to 7.3%, largely due to lower fuel prices that took effect at the beginning of the month.

Gasoline fell by R1.32/litre during the month and diesel by 88c per liter. This is also expected to dampen food prices, with the BER anticipating some rise in food price inflation.

“We expect some of this, as the oils and fats category is likely to have stabilized in August after significant gains in recent months. Anecdotally, there are indications that meat prices may have stabilized for the time being,” the report said.

In addition to the good news, gasoline prices appear to fall by R1.24 per liter in October, according to data from the Central Energy Fund. However, the positive spin is not being carried over to diesel, which appears to be rising by a whopping 50 cents per litre.

High diesel prices will have a knock-on effect on the freight and transportation industries, which could put further pressure on food price inflation.

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