Finch: SA economy not likely to recover over medium term

Fitch Solutions does not forecast South Africa’s economy to fully recover from the Covid-19 pandemic over our medium-term forecast period (2020-2024).

According to Fitch Solutions Country Risk & Industry Research, South Africa’s economy has been significantly impacted by the Covid-19 pandemic with real GDP forecast to decrease by -6.4% y-o-y in 2020.

While our Fitch’s Country Risk team forecasts real GDP to begin to recover in 2021 at 2.1% y-o-y, they note that the economy is not likely to fully recover over our forecast period (2020-2024). Fitch Solutions projects real GDP to total ZAR3.14trn (USD475.8bn) in 2024, down from ZAR3.16trn (USD474.2bn) in 2019.

Fitch Solutions notes that household disposable incomes will feel the pressure as a consequence of a slow economic recovery. Consumer price inflation is projected to average 4.2% y-o-y, growing at the same rate as household disposable incomes over the forecast period (2020-2024).

This means that whilst incomes will grow, the cost of living will expand at a similar pace. South African consumers are not forecast to witness any real wage gains over the medium-term (2021-2024).

This dynamic will force consumers to trade down on price points and focus on staples and essential food and drink categories as an outcome.

South African companies will therefore have to navigate the challenges the country is facing, with investment sentiment dampened and consumer appetite weakened. A sector that has a navigation tool at its disposal is mass grocery retail (MGR), with the environment outlined above a driver for demand in discount and wholesale retail.

South Africa’s MGR sector is already relatively well developed, with a number of domestic supermarket chains, such as Shoprite, Pick n Pay and Spar, having the ability to offer low pricing goods and therefore compete with discounters.

The wholesale segment is characterised by limited market penetration, although a number of domestic cash & carry stores are present, typically located near townships.

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