Fasten your seatbelts. We’re in for a bumpy ride.
The South African economy has lost momentum since the middle of 2021, despite the ongoing revival of world economic activity and numerous promises by government that policy implementation would be dramatically improved.
While the lockdown has impacted all income groups, data shows that South Africa’s middle-class have been some of the hardest hit. For those taking home more than R20,000 per month, the total debt to annual net income ratio is now 146%, and they need almost two-thirds (65%) of their take-home pay to service their debt repayments.
Global inflation is already at its highest level since 2008, while in emerging market and developing economies, inflation has reached its highest rate since 2011. This means that many emerging and developing economies, including South Africa, are having to raise interest rates, to contain inflationary pressures, well before the economic recovery is complete.
SA is still waiting for a sustainable uplift in economic growth and employment
In the third quarter of 2021, SA’s GDP declined by -1.5% quarter-on-quarter, seasonally adjusted but non-annualised. (It was 1.1% in Q2 and 0.9% in Q1 2021.) The decline in activity was concentrated in retail, manufacturing, and mining, although agriculture, transport and construction activity also slumped. The weakness can be mainly attributed to a combination of looting/unrest in July 2021, electricity outages and pronounced job losses. It is also important to recognise that business and household confidence remains weak, while government policy implementation remains unconvincing.
For 2020 as a whole, the South African economy declined by -6.4%, and it is expected to grow by around 4.7% in 2021. After the latest decline in GDP, the economy is still 3% below the level of GDP that prevailed in the first quarter of 2020, and 3.4% below its 2018 peak. At the same time, total employment remains a staggering 2.1 million below its level prior to the onset of Covid-19 and 2.25 million less than the peak achieved at the end of 2018.
SA’s economic performance surprised on the upside in the first half of 2021, buoyed by better export receipts due to higher international commodity prices, as well as an uplift in retail activity helped by an easing of lockdown restrictions. Unfortunately, this positive sentiment all changed with the shock unrest/looting in July 2021, which was then compounded by the third wave of Covid-19 and the return of electricity outages. At the same time, the agricultural sector declined, partly due to base effects, while the lack of fixed investment activity further dented the construction sector. The South African economy has clearly lost momentum since the middle of 2021, despite the ongoing revival of world economic activity and numerous promises by government that policy implementation would be dramatically improved.
Critically, GDP is forecast to grow by only around 2.1% in 2022, assuming that:
- the latest Covid-19 variant can be mostly contained in early 2022
- the vaccine rollout improves meaningfully
- interest rates hikes remain modest
- there is an improvement in international tourism during the second half of 2022 (although off a very low base)
- electricity and water outages remain broadly manageable and become less disruptive during the year
- government is able to avoid any significant tax increases in February 2022 (with the exception of excise duties and the fuel levy/Road Accident Fund)
- Operation Vulindlela gains some momentum.
Unfortunately, a growth rate of 2% is still well below the rate required to inspire an increase in private sector fixed investment and widespread job creation.
SA: looking forward
The traditional policy measures typically implemented to revitalise economic growth under current circumstances are restricted in SA, especially fiscal and monetary policy. Government cannot afford to cut taxes extensively to boost household consumption and corporate investment, given the extreme fiscal constraints. Equally, the government does not have the scope to meaningfully increase its own spending, given its current debt trajectory. This means that government’s growth initiative (as outlined in the Reconstruction and Recovery Plan) needs to move ahead rapidly in trying to initiate a wide range of private/public infrastructure partnerships to stimulate growth and employment. This includes deregulating economic activity and continuing to make it easier to do business. At the same time, the South African Reserve Bank has clearly signalled that interest rates can be expected to move higher during 2022.
Ultimately, the success of the government’s growth and employment agenda in 2022 and beyond will be determined, not by the quality of the policy document but by its ability to make progress in implementing real reforms that encourage the business sector. Closing the gap between SA’s current trend growth rate and a modest target of 3% to 4% on a sustained basis will require a significantly larger implementation effort than is currently evident, including the co-ordination of economic policy across key government departments and actively partnering with the private sector.
SA’s inflation is on the rise, moving up from a recent low of 2.9% in February 2021 to well above 5% at the end of 2021. It is expected to remain above 5% during the first few months of 2022, but then slowly start to moderate to a year-end level of around 4.5%. This forecast assumes that the oil price remains around $80/bbl over the next few months, but then eases back to around $70/bbl in 2022, and that food inflation starts to slow to below 5% in late 2022. Global food inflation remains elevated, while persistent global supply disruptions have exerted upward price pressures in many sectors of the global economy – and are clearly a risk to SA’s inflation outlook.
The recent upward trend in inflation encouraged the South African Reserve Bank to increase the repo rate (repurchase rate) by 25 bps to 3.75% at its Monetary Policy Committee (MPC) meeting in November 2021. The decision was not unanimous, with three members of the MPC preferring an increase in rates and two members voting for rates to remain unchanged.
Critically, the Reserve Bank highlighted the upside risks to domestic inflation, both over the short and medium term. At the same time, the MPC highlighted the downside risks to growth, including renewed electricity outages and some softening of precious metal prices.
The interest rate decision in November 2021 was entirely appropriate and consistent with the Reserve Bank wanting to ensure that inflation is anchored around the midpoint of the inflation target. By controlling the upward pressure in inflation, the bank ultimately limits the longer-term damage that higher inflation would inflict on SA’s overall economic performance. As expected, the MPC also stressed that, although the repo rate is going up, interest rates remain highly accommodative by historical standards – which is a fair point.