Developments shaping the South African economy going forward

South Africa, like many emerging markets, finds itself in a precarious position. Over the past two years a wide range of global developments have had a largely adverse impact on South Africa’s macroeconomic environment, including the COVID-19 pandemic, widespread disruptions to global supply chains, and surging global inflation.

Photo taken in Johannesburg, South Africa
Picture of Kevin Lings

Kevin Lings

Chief Economist

Key takeouts
  • SA’s economic performance could improve over the next few years

  • Abating inflationary pressure is expected to lead to rate cuts

  • The President’s ‘Energy Action Plan’ should enable SA to achieve energy security

  • Fixed investment growth is expected to jump through public-private partnerships (PPPs)

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The South African economy is facing a range of cyclical as well as structural impediments to growth, and they are being amplified by a weakening global economic environment. Fortunately, the implementation of key structural reforms, combined with lower interest rates and a global economic upswing in 2024, could start to improve SA’s economic performance over the next few years.

 Globally, there has been a  significant slowdown in economic activity. In the October 2022 World Economic Outlook (WEO), the International Monetary Fund (IMF) highlighted that the global economy continues to face three significant challenges: Russia’s invasion of Ukraine; a cost-ofliving crisis caused by persistent and broadening inflation pressures; and a slowdown in China, amid frequent lockdowns under its zero-Covid policy and the ongoing weakening of its vital property sector. 


Given these challenges, the IMF revised down its global growth forecast for 2023 to 2.7%. This compares with an estimate of 2.9% in July 2022 and 3.6% in April 2022. The long-term average growth rate for the world economy is around 3.4%. More than a third of the global economy is forecast to decline this year or next, while the three largest economies — the US, EU and China — will continue to stall. 


Persistent and broadening inflation pressures have triggered a rapid and synchronised tightening of monetary conditions, along with a powerful appreciation of the US dollar against most other currencies. 


The sharp appreciation of the dollar adds significantly to price pressures in many smaller economies, including SA. Under these circumstances, global inflation is forecast to rise from 4.7% in 2021 to 8.8% in 2022, but to decline to 6.5% in 2023 and 4.1% by 2024, partly because of higher global interest rates. 


Unfortunately, the balance of risks is tilted firmly to the downside, with about a 25% chance that global GDP growth in 2023 will fall below 2%. Avoiding these risks requires monetary policy to remain on track to restore price stability, while fiscal policy needs to either complement monetary policy or, at least, remain neutral. 


The South African economy remains constrained by structural impediments 


SA has not been spared from these developments. The country is also battling with elevated inflation and rising interest rates, in an environment of extremely low economic growth amid both domestic and international developments. 


While SA’s price pressures probably peaked. in July, the inflation rate is still expected to remain above 7% for the remainder of 2022, forcing the Reserve Bank to continue increasing interest rates. In the short term, the Reserve Bank cannot afford to be complacent in guarding against a broad-based deepening of inflationary pressure. Therefore, it seems reasonable to assume that it will continue to hike rates into early 2023. 


From a growth perspective, SA’s underlying performance has been weak, despite an ongoing recovery from the Covid-19 pandemic. In the second quarter of 2022, SA’s GDP declined by -0.7% quarter-on-quarter (seasonally adjusted but not annualised). This latest decline was broad-based, including declines in mining, manufacturing, retail, construction, and agriculture. 


Although the floods in KwaZulu-Natal and increased electricity outages since June 2022 hurt economic activity, the high rate of inflation, coupled with rising interest rates and weak consumer and business confidence, also inflicted significant pain.


The ongoing and substantial weakness in construction activity is especially troubling since the South African government has been focused on encouraging infrastructural renewal in recent years. 


Given the latest decline in GDP, the South African economy is forecast to grow by around only 1.8% in 2022. This forecast would be significantly higher if the country’s productive sectors were embarking on a significant capex and employment growth initiative. Unfortunately, this growth rate is still below the rate required to inspire an increase in private sector fixed investment and widespread job creation. 


SA’s medium-term economic outlook has Improved 


While the next three to six months remain challenging for SA, it is not all bad news. There have been some positive developments that may see the economy improve going into 2024. 


Firstly, in the short term, risks to inflation are still to the upside, given a range of factors including trends in global inflation, recent increased demands for higher wages, a weaker exchange rate, the potential of a prolonged spike in agricultural and food prices, and upward pressure on administered prices. However, inflation is expected to slow meaningfully in 2023, ending the year at around 4.6%, helped largely by base effects in fuel and food inflation. 


Once inflationary pressures have abated more convincingly, the Reserve Bank will want to pause and assess the need for any further rate hikes – especially if the inflation rate is heading towards 4.5% at the end of 2023 and the major central banks are also considering ending their own rate hiking cycles. This should open the door for the Reserve Bank to consider cutting interest rates late in 2023 or early in 2024. 


Secondly, there has been a systematic increase in private sector investment in the energy sector, especially following the announcement of the President’s ‘Energy Action Plan’. The acceleration of broader reforms to create a competitive electricity market, including the removal of the licensing threshold for embedded generation, has further stimulated private sector participation in energy generation. These reforms have unleashed over 80 private sector projects, some of which are expected to start in 2023 and gain momentum in 2024. 


If implemented accurately, the energy plan should enable SA to achieve energy security. The ‘Energy Action Plan’ is critical to re-invigorating the economy over the coming years. 


Given the early success in the energy sector, it is evident that government is moving ahead more purposefully with using public-private partnerships (PPPs) in other sectors. 


This was shown in government’s increased focus on reallocating expenditure towards infrastructure spending in the 2022 Medium-Term Budget Policy Statement (MTBPS). Government’s current infrastructural development initiative, including allowing the private sector to get more fully involved, is likely to result in some announcements on ports, transport, and water projects in 2023 and work getting under way in 2024. Fixed investment growth is expected to jump to 4.8% in 2024, an 11-year high, amid increased activity. 


Another positive development for SA is the continued improvement in the tourism industry. While the number of foreign tourists visiting SA on a monthly basis is still over 50% below pre-Covid levels, there has been an ongoing improvement. The average number of foreign tourists has increased from 188 000 per month in 2021 to almost 400 000 per month so far in 2022. As the summer season approaches, these numbers are expected to continue rising. This will generate additional income for the hospitality and services industry, and thus additional consumption spending. 


Global inflationary pressures are expected to start abating in the latter part of 2023. This is likely to result in global interest rate cuts from the beginning of 2024 and improvements in the global economic outlook. According to the IMF, global inflation is forecast to decline to 6.5% in 2023 and 4.1% by 2024, while global GDP growth is expected to recover to 3.2% in 2024 from 2.7% in 2023. Overall, the global landscape should become more supportive for SA’s economic outlook towards 2024. 



Given all these developments, forecasts for SA’s economic growth remain constructive. It is clear from the vast array of data provided by National Treasury in this year’s MTBPS that current fiscal and economic reforms are only expected to begin yielding meaningful results over the next few years. Overall, the economic growth outlook for SA should start looking more positive in the second half of next year, going into 2024. 


While 2022 and 2023 GDP growth will remain well below 2% amid ongoing load shedding, global headwinds and a lack of consumer and business confidence, 2024 is likely to be a better year. GDP growth is forecast to jump to 2.4% in 2024, which would be the highest growth rate since 2013, amid government’s determination to push ahead with various critical fiscal reform measures. These measures are aimed at increasingly altering the mix of spending away from consumption and in favour of increased fixed investment activity, such as developing infrastructure.


This article appears in the Q4 2022 edition of our StandPoint publication. Click here to download a copy of the full publication. 

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