KwaZulu-Natal (KZN) is the second largest contributor to national GDP (16.3%) with the tertiary sector accounting for close to 70% of provincial GDP. In recent years, KZN has been plagued with severe drought conditions, weak domestic and global demand dynamics and subdued levels of business confidence. While credit rating downgrades by S&P and Fitch will certainly have a negative impact on growth, KZN is cyclically better positioned for a mild upturn in GDP prospects.
After two consecutive yearly contractions in agriculture, the drought has dissipated, dam levels are up and the Agbiz/IDC Agribusiness Confidence Index is above the 50 neutral mark (57 in March 2017). Accordingly, a much better harvest yield is expected this year given the good rains we have had.
Household consumption is anticipated to pickup given some inflation relief from the dissipation of the drought and a rise in global demand, as evidenced by a sharp turnaround in global manufacturing and services PMIs, should boost KZN’s exports. While we remain cautiously optimistic about an improvement in the domestic growth trajectory, we are mindful of the headwinds KZN faces. Recent tax increases coupled with an effort to consolidate the fiscal budget will limit potential growth. We anticipate that the provincial government will struggle to maintain infrastructure spending targets, particularly in light of recent credit rating downgrades resulting in higher debt servicing costs. This could potentially be a costly outcome in terms of sustainable long-term growth; hence our key theme from our previous chartbook of doing more with less remains very much intact.