Annabel Bishop | Investec’s chief economist

16 Sep 2022

Economic outlook improving in the medium and long-term

Annabel Bishop

Annabel Bishop

Investec’s chief economist

South Africa is facing some substantial opportunities over the next five years, and with the full opening up of the economy, there is evidence of improved levels of activity (if sporadic) already, not least due to global events. 

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While these disruptive factors have included, in the near-term, the effects of climate change, the Russia/Ukraine war, and the upwards inflation and interest rate cycles (and climate change will be with us in the medium and long-term too), there is optimism to revise economic growth expectations upwards for the next few years. That is, the remainder of this year and 2023 will be afflicted by the slowing global economy on the back of higher interest rates and high inflation effects, but 2024 is likely to see marked recovery, if not towards the end of 2023, spurred domestically by heavy infrastructure investment in the electricity sector.

Substantial levels of infrastructure investment in power generation have spill-over effects, not just spurring growth in fixed investment and so GDP, but also increasing the capacity of the economy to support faster economic growth and so job creation, creating a multiplier effect with further positive knock-on effects on incomes and employment. Indeed, insufficient levels of electricity supply, with South Africa’s availability factor having fallen to around 60%, is a key constraint to business confidence, as are other inadequate provisions of state services, such as the lack of fully functioning rail, port, and state bureaucracy systems. Deregulation and private sector provision of state services are planned in part, but SA needs to see this rapidly eventuated and expanded to reap consistent annual economic growth rates of 3.0% y/y and above.

The likely positive infrastructure effects will be medium-to long-term in nature however, while this year South Africa still has to turn the corner on high inflation and reach the terminal interest rate (the level at which the last interest rate hike reaches in the current cycle).

High global energy, food, and supply chain costs and pressures (and all not unrelated) have accelerated price increases this year over last (ie, the price inflation rate), with this annual measure of the cost of living typically showing rapid increases around the world, but also expected to peak this year still. While inflation may already have peaked in the current quarter for SA, inflation pressures are broadening and the SA Reserve Bank is likely to hike into the fourth quarter with the terminal repo rate at 6.50% in November, and so the prime lending rate at 10%.

However, there are high levels of uncertainty still, and this is displayed by the rand’s weakness, as global financial market risk sentiment is very elevated, with the risk-off environment having seen the sell-off of risk assets, which typically include equities, EM portfolio assets and so EM currencies. And indeed, while South Africa’s CPI inflation rate is likely to have peaked in Q3.22, there is no certainty, particularly if further shocks hit the global financial system.

However, the third quarter of this year has seen a couple of fuel price cuts, which will exert some subduing pressure on price inflation, which has already begun in the US, although the path of disinflation (decelerating inflation) is likely to be slow. That is, South Africa’s CPI inflation will not fall rapidly from around 8.0% y/y to the 4.5% mid-point of its inflation target.  

There is uncertainty both in the inflation and economic growth outlook for the remainder of this year and next, but longer-term economic growth is expected to strengthen domestically and globally, although climate change remains a key risk. The ANC elective conference takes place in December, with President Ramaphosa not expected to be unseated, but there is much greater uncertainty on the election for the deputy President position.

Some recent surveys have shown improved sentiment towards the ANC on the President’s recent planned reforms which aim to increase the free function of markets and so the economy and employment creation.

Globally though, net emissions still need to be currently cut by 2050 to limit global warming to tolerable levels of 2°C or below, with the earth having already heated by an estimated 1.2°C since pre-industrial times.

Climate change is already having damaging effects by changing the seasons, with the World Economic Forum highlighting summers are getting longer, and so winters shorter, with 78 days of summer in 1952 versus 95 in 2011 (source IPCC’s RCP 8.5 scenario).

 “(U)nder the current business-as-usual scenario … which forecasts that emissions will continue to rise throughout the 21st century - summer could even last for six months (166 days) by 2100”. “(A)nd while longer summers might sound pleasant …, even small seasonal shifts can throw off the … ecosystem, … negatively effecting crop production … increasing the occurrence of … diseases … the length of heat waves and wildfires and … air pollution”. (Statistica, Cruel Summer, Claire Jenik).

Global efforts are expected to intensify in the medium- to long-term, rapidly increasing fixed investment levels too, contributing to growth, although there will be some economic trade-off – with higher inflation for longer one of them.

South Africa is already on the path of seeking to rapidly convert to a clean energy environment, which will have the effect of combating falling exports of fossil fuels, and goods produced via fossil fuel electricity, which will make it more competitive globally.