The South African economy is in trouble, caught in a long-term trend of economic stagnation. The trend has not changed and is very clear in the data, says financial services company Nedbank.
While the country is in the process of recovery, this is not really growth, but rather the normalisation of economic activity coming off a very low base.
This has raised the question: what will drive activity over the next 12 months?
Nicky Weimar, head of economics at Nedbank, spoke at the recent Nedgroup Investments MultiManager Insights and outlined five key things that will play an important role next year.
1. Covid-19 uncertainty
The trajectory of the Covid-19 pandemic remains a key uncertainty and will have a bearing on economic performance. We have seen a rise in infections again in the last few months; this time, the delta variant has driven the surge. The latest jump on a global scale was mainly due to a surge in Asia and the US infections.
Locally, we are still in the third wave, and it seems to have a very long tail – it’s harder to bring the cases down to a lower level and will therefore continue for much longer than previous waves.
The good news is that we now have data showing us that vaccines work to protect against hospitalisation and death.
Although we can’t really talk about herd immunity anymore, the key is to get everyone vaccinated as quickly as possible. This will relieve pressure on hospitals and remove the threat of death and make Covid much like standard flu. The strategy for South Africa has to be on focussing on vaccinations and accelerating the vaccine rollout as much as possible.
The leaders in vaccinations so far are predominantly richer countries. Sadly, although the vaccine is readily available in some countries, the demand for vaccines has dropped significantly.
Meanwhile, emerging countries are catching up, and we are doing quite well on that front. South African numbers show that over 10 million Covid vaccination doses have already been administered, and we are getting onto the map regarding vaccine rollout problems.
This is important because it will determine if we repeatedly enter lockdown cycles which is hugely disruptive to the economy. If we can get the vaccine rollout going even faster – it will reduce the risk of us entering stricter lockdown in the next 12 months, which improves the chance of economic growth.
Getting many people vaccinated will also help open our borders and enable countries to reconsider their views on travelling to South Africa. The return of international tourists is crucial for the hospitality industry, which is a big employer.
A factor that will drive growth is exports. Exports have already been a key factor in helping to return South Africa to some level of growth over the last year, and we believe it will remain so. There have been many advantages for the windfall as a result of exports.
For one thing, we are net earners of foreign exchange, which has helped our currency and ultimately helped moderate producer and consumer inflation. Exports have also boosted government revenue, allowing them to provide additional support after the riots and destruction in July. So exports are important.
Will the trend continue? To answer this, we need to look at global growth and commodity prices.
Generally, it looks like the global recovery will continue despite some concern about the delta variant. There is also a very supportive economic policy trend globally, especially in the US.
Although these policies will start to be scaled back, the reality is that the recovery will remain at a very high rate even after they normalise, so the global growth should continue, led by the US and China. The IMF has recently revised its growth forecast upwards.
The other element is commodity prices. The consensus is that the commodity boost is temporary. However, I think the world has changed so much from a climate change perspective, and the world is running out of time.
So, whether we like it or not, we need to invest in a new configuration of the economy to mitigate the damage of climate change. Europe is gearing up for this already. Even in the US, there is a push to transition to clean energy.
These new technologies actually use far more commodities than traditional ones. This includes things like lithium, cobalt, chrome, manganese etc. So, the rise in commodity prices may not be temporary.
There won’t likely be a continual surge, but commodity prices may remain elevated as the drive to green technology gains momentum. We think this will also support exports in SA which will boost the economy.
3. The energy situation
The biggest barrier to growth in South Africa is our energy situation. This factor has contained growth in mining and manufacturing and construction activity leading to long-term stagnation.
The good thing is that the government realises this is a major problem, but they are simply not moving fast enough on this front and need to step up to implement new laws.
However, the energy policy is still not smart enough – we are still talking about nuclear, which we cannot afford with public debt levels sitting so high. We have an obvious advantage in terms of our exposure to sunlight, wind, and the Karoo, with its big wide-open spaces, create massive opportunities for renewable energy projects.
4. Government infrastructure projects
A significant growth driver could be key infrastructure projects identified by the government, ranging from road and water infrastructure to student housing.
There has been some progress on this front. Interestingly, in the second half of 2020 and the first half of 2021, government capital expenditure increased, which is encouraging.
Government must drive this because the private sector won’t support this because of the low confidence. The government will have to lead the drive in this.
The final factor that will determine economic activity is inflation. The inflation rate has remained contained, which has allowed spending in South African households. The scene is set for a consumer recovery in spending, which will help turn the economy’s wheels.
Even as interest rates rise, they will still be lower and supportive of consumer spending, so we think this could lead to a strong rebound in retail sales.
We think the economy will continue to recover at around 4% this year and around 2% next year. Thereafter it will depend on solving the electricity crisis and government infrastructure projects. If they fail to do this, the long-term trend of economic stagnation will continue.
- By Nicky Weimar, head of economics at Nedbank