5 minute read 26 July 2023

South Africa economic outlook, July 2023

South Africa currently faces a cost-of-living crisis. Further monetary tightening may stabilize prices and provide relief to the poorest but it may also jeopardize economic growth.

Simon Schaefer

Simon Schaefer

South Africa

In his State of the Nation Address at the beginning of the year, South Africa’s President Cyril Ramaphosa identified the cost-of-living crisis as one of the country’s top four challenges for 2023.1 Given that household consumption is a key component of the country’s overall expenditure (accounting for about two-thirds of GDP in the first quarter of 2023), ongoing pressure on households may have a negative impact on South Africa’s economic outlook.2

While the cost-of-living crisis is a widespread issue affecting many economies across the world, it is worthwhile to unpack it from a South African perspective given the socioeconomic challenges—such as inequality, poverty, and unemployment—the country is facing. The World Bank regards South Africa as the most unequal society in the world and its unemployment rate—currently sitting at about 33%3—as the highest globally.4 These two factors result in very different inflation experiences across income groups.

Food prices in South Africa, like in many other markets, are not immune to external developments. Supply chain challenges and geopolitical events, such as the Russia-Ukraine conflict, have had a significant impact on global food prices and consequently on overall inflation trends.

While South Africa has a well-developed agricultural sector, it relies on imports to meet its domestic demand for key agricultural products and inputs, which exposes the country to global commodity-price fluctuations. For instance, South Africa covers about 50% of its wheat demand and about 80% of its fertilizer demand through imports.5 The National Agricultural Marketing Council estimates that between May 2021 and May 2022, domestic fertilizer prices for potassium chloride, urea, and monoammonium phosphate increased by almost 180%, 140%, and 102%, respectively, owing to higher international market prices.6

This high import dependency on certain food items and agricultural inputs, combined with rising international prices and a weak local currency, has led to spiraling inflation. While South Africa is self-sufficient in maize, a critical staple for many in the country, maize prices have experienced an increase of 37% between May 2021 and May 2023.7

The country’s ongoing electricity crisis has acted as an additional driver of high local food prices as farmers and other key players in the food supply chain had to resort to alternative, and often costly, energy sources and ultimately passed some of these additional costs through to consumers.

While South Africa’s headline inflation has eased since its peak in July 2022, food inflation continued to rise sharply until March 2023 (figure 1). In April 2023, food inflation was 7.1 percentage points higher than headline inflation, reflecting the divergent speed of price developments across categories. It also suggests different inflation experiences across income segments.

Due to different spending patterns, poor households tend to experience inflation much worse than rich households. According to Statistics South Africa, the country’s national statistics agency, poor households that spend less than R20 140 per year (ca US$1,070) allocate on average 50% of their budgets toward food and nonalcoholic beverages. In contrast, the richest households spending more than R312 247 per year (ca US$16,610) allocate on average 11% toward food and nonalcoholic beverages (figure 2).

As a result of the disproportionally high allocation toward food and stubbornly high food prices, poor households are the hardest hit by inflation and have in fact been experiencing high inflation for a prolonged period. Spending half of their budgets on food and nonalcoholic beverages also leaves poor households with little room to reallocate budgets away from nonessential spending towards food. Over the last 12 months, the poorest decile of households (Decile 1) experienced a much higher inflation than the overall consumer price index (CPI), while the richest decile (Decile 10) enjoyed inflation below the CPI for 11 of those 12 months (figure 3).

Not only has high food inflation put tremendous pressure on poor households, it has also reduced their ability to afford nutritious and healthy food. According to the Pietermaritzburg Economic Justice and Dignity Group (PMBEJD), a civil society organization that tracks food prices and compiles the household affordability index, the cost of the basic nutritional food basket has increased by 12.2% year over year in May 2023, and hence is slightly higher than overall food price inflation of 12% for the same month.

The PMBEJD also highlights that in May 2023, the child-support grant of R500 (ca US$26) per month was 45% below the average monthly cost of a basic nutritious diet for a child, illustrating the difficulty poor households face while balancing between putting food on the table that satiates hunger versus food that is nutritious. This trade-off is worrisome, as lack of nutrition could lead to stunting and have adverse implications on children’s cognitive development.8

Addressing food insecurity remains an urgent task in South Africa. Without meaningful and effective interventions, stubbornly high food prices combined with high unemployment and poverty present an alarming mix that is likely to have long-term socioeconomic implications, potentially trapping children born into low-income households into a vicious cycle of poverty.

While inflation has started to ease and is expected to return to levels that fall within the South African Reserve Bank’s target range of 3% to 6% in 2024,9 the poor in South Africa are likely to pay the highest price for high food inflation in years to come.

According to the Deloitte’s State of Consumer Tracker, compared to consumers in other markets, high food prices have led to greater frugality among South African consumers. This consumer shift toward essential items may pose challenges for nonfood retailers who will have to compete more aggressively for the squeezed share of nonessential spending in South Africa.

Despite the easing of inflation in recent months, the South African Reserve Bank Governor Lesetja Kganyago has indicated that it was too early to loosen the country’s monetary policy.10 While the tighter-for-longer policy is likely to support the further easing of inflation, it could potentially delay any significant uptick in growth. In the light of this, the Reserve Bank has to walk a tightrope of finding the right balance between stabilizing prices, which would reduce pressure for low-income households, and helping with stimulating economic growth through lower interest rates in an economic environment subject to a range of challenges, most notably deep structural constraints to growth.

  1. South African Government, “President Cyril Ramaphosa: 2023 State of the nation address,” February 9, 2023.

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  2. Statistics South Africa, Gross domestic product: First quarter 2023, accessed July 19, 2023.

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  3. Statistics South Africa, Quarterly labour force survey–Quarter 1: 2023, accessed July 19, 2023.

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  4. World Bank, “World bank open data,” accessed July 19, 2023.

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  5. Wandile Sihlobo, “How South African agriculture—and consumers—will feel the war in Ukraine,” Econ3x3, March 9, 2022.

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  6. National Agricultural Marketing Council, Input cost monitoring—June 2022, accessed July 19, 2023.

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  7. Statistics South Africa, Consumer price index—May 2023, accessed July 19, 2023.

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  8. UNICEF, “Nutrition—Good nutrition is the bedrock of child survival and development,” accessed July 19, 2023.

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  9. International Monetary Fund, “IMF executive board concludes 2023 Article IV consultation with South Africa,” press release, June 6, 2023.

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  10. Bloomberg News, “Kganyago sees interest rates higher for longer,” News24, June 28, 2023.

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Cover image by: Jaime Austin

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