SA follows rest of the world in reduced potential growth
Will South Africa fall into the recession trap where the rest of the world is heading or will our growth improve?
South Africa is following the rest of the world in reduced potential growth made worse by insufficient and inconsistent electricity supply. Interest rates are increasing in line with the rest of the world and growth prospects are being reduced accordingly.
The KPMG Global Economic Outlook H2 2022 shows the country is returning to pre-Covid-19 levels of economic growth and currently faces the inflationary implications that are a direct consequence of the pandemic and the war in Ukraine.
“The South African policy rate increased from a low of 3.5% in the third quarter of 2021 to a current level of 5.5% and the consensus forecast is for a further increase of around 1 percentage point by the end of 2022.
“These increases would leave the policy rate at the level recorded before the onset of the pandemic and result in a reduction in potential growth level attainable over the near term,” Frank Blackmore, lead economist at KPMG, says.
Electricity supply main contributor to slow economic outlook
He points out that, although increasing interest rates resulted in slowing growth prospects, the main contributor remains the insufficient and inconsistent supply of electricity, with over half of all business days in the second quarter of 2022 experiencing some degree of load shedding or electricity supply restriction.
“Government has recognised this barrier to growth by announcing the scrapping of license requirements for private power generators in a sweeping overhaul of the South African energy industry in July.
“However, given the lags associated with implementing large-scale energy projects, it will take some time before the effects of these policy changes are realised.”
South Africa remains in a unique position where many of its natural resource exports mirror those of Russia and consequently the country has profited from the increase in commodity prices initially caused by Covid-19, as well as the conflict in Ukraine.
The result of the increase in commodity prices was an improvement in South Africa’s terms of trade which has led to surpluses on its current account since 2020.
The report indicates that gross domestic product (GDP) is set to grow by around 1.8% in the second half of 2022, led by contributions from the finance, real estate and business services sector, as well as growth in personal services and mining, agriculture, trade, catering and accommodation.
The projected growth is noticeably lower than in 2021, but Blackmore says it should, however, be understood that much of that growth was due to technical base effects following the sharp Covid-19 induced contraction experienced in 2020.
KPMG estimates that growth will decline further to 1.5% in 2023, with higher interest rates and lower global growth reducing aggregate demand locally. In 2024 economic growth should return to the average pre-Covid-19 level of around 1.7% as inflationary pressures abate and global growth rates improve.
Little tangible policy action
The report also points out that little tangible policy action was taken to increase the lower investment and consumption spending caused by a reaction to a number of governance failures, including ongoing policy uncertainty, corruption, aging infrastructure and continued power shortages, the absence of growth-stimulating policy interventions and inadequate levels of service delivery.
“More will have to be done to lift the South African growth trajectory above its current long-term level,” he says. The report also warns that the predicted rate of economic growth over the 2022 to 2024 period would not be sufficient to reduce the high unemployment rate forecast at 34.3% for 2022.
KPMG expects that South Africa will remain in a paradoxical state of a growth recession, where slow growth is accompanied by rising unemployment, unless some of the barriers to growth listed above are explicitly addressed.
Global inflationary pressure also continues to weigh on the economy and remains largely cost push in nature as aggregate demand still lags below its potential level.
The main drivers will still be energy prices, including both fuel and electricity prices, as well as food prices caused by ongoing supply chain disruptions following the pandemic and exacerbated by the war in Ukraine.
Blackmore says despite the slowing of the global increase in commodity prices, South Africa still faces elevated fuel and food production costs. “Energy supply and in particular electricity, remain an ongoing concern for South Africa with the energy regulator awarding the state-owned utility an above inflation (9.6%) increase in energy prices from 1 April 2022.”
The positive balance on the current account resulting from elevated commodity exports is not large enough to shield South Africa from the strengthening US dollar and these inflationary increases although it supports the Rand, he says.
KPMG expects the headline consumer inflation rate to reach well above the upper boundary of the central bank’s inflation targeting range of 3% to 6% at around 7.3% in 2022, before moving back towards the upper bound of 6% in 2023 and further to the midpoint of the targeting range in 2024.