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South Africa, like many emerging markets, finds itself in a precarious position. Over the past two years a wide range of global developments such as the Covid-19 pandemic, widespread disruptions to global supply chains, and surging global inflation have had a largely adverse impact on SA’s macroeconomic environment.
More recently, Russia’s invasion of Ukraine in February 2022 resulted in increased global risk aversion, a surge in international oil and food prices, as well as a significant moderation in global economic activity.
Equally, China’s strict zero-Covid strategy has resulted in severe lockdown measures being introduced in various parts of that country in recent months, inflicting more damage than expected to both the production and consumption side of the economy. The significant loss of momentum in Chinese economic activity during the second quarter of the year resulted in a further moderation of global growth and aggravated an important part of the global supply chain.
These events are unfolding at a time when the global economy has not yet fully recovered from the Covid-19 pandemic.
In addition, broadening price pressures around the world have pushed global inflation up to over 9%, requiring most central banks to increase interest rates at a faster pace than expected. Most noticeably, the US Federal Open Market Committee recently decided to increase rates by 50 basis points (bps) to a range of 0.75% to 1%, signalling that further rate hikes are to be expected in the months ahead.
First half: Local challenges persist
From a domestic economic perspective, three developments continued to hinder SA’s economic progress in the first half of 2022.
- Load shedding returned with a vengeance in 2022. As at the end of May 2022, there had been 28 24-hour cycle days (673 hours) of load shedding, compared with around 20 days in 2021.
- The floods in KZN have derailed some of the positive momentum that had been building in the first quarter of 2022, hurting growth nationwide.
- There continues to be a systemic lack of effective policy reform implementation. While Operation Vulindlela is making good progress, most of the key reforms vital to boost recovery in the short term and improve long-term growth prospects are still lagging.
All these developments have had a largely negative impact on a wide range of domestic economic factors.
From a currency perspective, the rand initially strengthened following the Ukraine invasion, helped enormously by SA’s position as a net commodities exporter. At the end of March 2022 the rand exchange had strengthened to R14.47 to the dollar, a gain of more than 9%. However, it has since weakened significantly, depreciating by more than 9% against the dollar up until the middle of June 2022.
The rand’s volatility, along with higher global food and commodity prices (particularly oil), has substantially driven up SA’s consumer inflation from last year’s average of 4.5%. In April 2022, inflation had risen to 5.9% year-on-year, which is very near the top of the South African Reserve Bank’s (Sarb) target, and is likely to rise to around 7% over the coming months.
In addition, while core inflation remained below the mid-point of the inflation target, at 3.9% year-on-year, there is some evidence to suggest a broadening of SA’s inflationary pressure.
This, together with trends in global interest rates, has resulted in the Sarb being relatively more aggressive in its interest rate hiking cycle. In its latest interest rate decision in May, the Sarb decided to increase the repo rate by a further 50bps to 4.75%. Since November 2021, the repo rate has now increased by a total of 125bps.
In terms of economic growth, SA’s GDP grew by a welcome 1.9% quarter-on-quarter in the first quarter of 2022, higher than the 1.4% quarter-on-quarter growth recorded in the final quarter of 2021. While SA’s economic performance surprised on the upside in the first quarter of the year, it is not necessarily indicative of underlying economic conditions.
Concerns around electricity outages, rising fuel prices, ineffective policy implementation and corruption continued to dampen SA’s overall performance.
Some high frequency data in the first quarter of 2022, show that economic activity remained erratic and struggled to gain momentum. Mining, manufacturing and retail sales all remain below the level of production and spending that prevailed prior to the onset of Covid-19 in 2020.
From the labour market perspective, SA’s unemployment rate improved to 34.5% in the first quarter, helped by a gain of 370 000 jobs during the quarter. Youth unemployment also measured significantly better at 63.9% in Q1 2022, down from 66.5% in Q4 2021. At the same time, despite some job gains in the first quarter, the number of people employed (formal as well as informal) remains a troubling 1.468 million below the level of employment prior to the onset of Covid-19.
Positively, SA’s tax revenue collection continued its strong momentum into the start of the second quarter, with growth averaging around 13% so far this year, which is much higher than the expected 2.2% growth presented in this year’s budget.
This was driven by improved revenue collection by government and a very supportive terms of trade position due to robust international commodity prices. In addition, the latest Absa PMI tentatively indicated a rebound in economic activity from the devastating flood in KZN and intense load-shedding, rising to 54.8 in May 2022 from 50.7 in April.
Second half: What can we expect?
The second half of 2022 is likely to be extremely challenging for the South African economy.
While the country is still benefitting from higher international commodity prices, a commensurate improvement in the trade balance as well as better-than-expected government tax revenue, consumer inflation is likely to continue to rise given the record fuel price and rising food prices. Consumer inflation is expected to increase to around 7% over the coming months, averaging above 6% for 2022 as a whole.
This will encourage the Reserve Bank to keep raising interest rates, taking the repo rate up to around 5.5% by the end of the year compared with 3.75% at the end of 2021.
Unfortunately, SA’s rate of economic growth is expected to remain sluggish during the remainder of 2022, limiting any meaningful uplift in employment. Clearly, the exceptionally high rate of unemployment is a national crisis, with significant social, economic and political implications, yet the political environment appears to still lack the level of urgency required to begin dealing with the crisis.
In that regard, the government’s current emphasis on infrastructural development and policy reform needs to gain momentum.
The lack of momentum in the domestic economy reflects not only an absence of fixed investment spending, but also sluggish consumer activity. In particular, the subdued pace of consumer spending is reflected in a moderation of real income growth as employment stagnates and wages struggle to keep pace with inflation. Equally, the lack of fixed investment activity is especially evident in the construction sector, which has declined in each of the past five years and lost further momentum in the first half of 2022.
To a large extent, SA’s economic challenges are reflected in weak business and consumer confidence, which are expected to remain subdued over the next six months given the combination of slowing real income growth, higher interest rates, high unemployment, record fuel and rising food prices, infrastructural bottlenecks, a distinct lack of progress in high profile corruption cases and increased political uncertainty.
Government remains committed to implementing key policy reforms, as well as reducing the infrastructural bottlenecks negatively impacting economic activity, including regular electricity outages, disruptions to water supply and breakdowns in critical port and rail infrastructure.
Unfortunately, progress has been slow and likely to remain underwhelming over the next six months given budget constraints within the broader public sector, and a lack of appropriate skills within many municipalities.
Instead, senior government officials, including the president, are likely to continue to be hampered by political in-fighting, with the upcoming ANC policy conference in late July as well as the ANC elective conference in December 2022 dominating the political landscape. This, together with the increased bureaucracy relating to the approval of government projects will tend to distract policy officials from implementing critical reforms.
Positive strides
More encouragingly, SA’s credit rating agencies have recognised the recent improvements in the government’s fiscal position and are expected to affirm an improved credit rating outlook later in the year.
In addition, the recent successful auction of spectrum licences should result in increased investment in the communications industry, while government has approved additional private sector investment in the energy sector, which will help to ease SA’s electricity constraints over the next couple of years.
One of the key challenges the South African economy faces is that the traditional policy measures a country would typically use to revitalise economic growth are restricted – most especially fiscal and monetary policy.
In particular, government can’t afford to cut taxes extensively in order to boost household consumption and corporate investment given the extreme fiscal constraints. Equally, the South African government does not have the scope to meaningfully increase its own spending given its current debt trajectory. At the same time, the Reserve Bank has clearly signalled that interest rates can be expected to move higher during 2022, which will increasingly act as a constraint on growth.
This means that government’s growth initiative (as outlined in the October 2020 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.
Kevin Lings is chief economist at STANLIB
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