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Big power cuts crash growth outlook: Absa

Big power cuts crash growth outlook: Absa
13-02-23 / Staff Writer,Tommy Jackson

Big power cuts crash growth outlook: Absa

Near-term growth prospects have slumped due to intensified power cuts. We have cut our GDP forecast for Q4 22 to -0.5% q/q sa and also project a Q1 23 contraction. For 2023 as a whole, the impact of power cuts on activity levels, business confidence and private investment cuts our GDP forecast by 0.9pp to 0.7%. The consumer has proven surprisingly resilient in 2022 despite headwinds, but for 2023 we halve our household consumption forecast from 0.8% to 0.4%.

We expect regular load shedding through to the end of 2024 at least. The National Energy Crisis Committee's roadmap for ending load shedding aims to add up to 8822MW of additional power supply in 2023 from a variety of sources, but we expect it to achieve only about half of this. It will be hard to lift the performance of Eskom's existing plants and new power supply takes time to procure and construct. Other structural reform progress remains slow and patchy, although the government recently added four new important reforms to Operation Vulindlela's to-do list.

Inflation has peaked and should return to the target range by Q2 23. Base effects on fuel and food price inflation combined with modestly rising core CPI inflation should see headline CPI falling below 6% in May 2023, and sustainably return to the target mid-point by mid-2024. Against a backdrop of China's reopening, oil prices remain an upside risk for our forecast inflation trajectory, while business's expenditure on back up diesel generation in the face of intense load shedding is a cost-push upside risk. We forecast CPI inflation to average 5.5% this year.

The current account has returned to a mild deficit. This is due to weak global demand for South Africa's exports, a lift to imports from renewable energy capex and a weakening of the terms of trade, combined with South Africa's ongoing deficit in invisible flows. Against a backdrop of still muted risk appetite, we now forecast a weaker rand at 18.00 USDZAR by end-year.

We believe the hiking cycle has now topped out. After a cumulative 375bp hike since November 2021, we believe that easing inflation amid dissipating adverse price shocks will allow the MPC to keep the repo rate on hold. We have pencilled in two rate cuts of 25bp each in September and November. However, the environment remains highly uncertain and we see risks of further tightening in the near-term and/or delayed easing if price pressures prove to be stubborn.

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