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PwC highlights impact of floods, prices increases, inflation on South Africa's economy

28th April 2022

By: Schalk Burger

Creamer Media Senior Deputy Editor

     

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Risk and advisory services firm PwC South Africa has flagged the impact of the floods, especially on manufacturing and transport; rising labour costs; and inflation as the key factors affecting the country's economic outlook.

The eThekwini metropolitan municipality reports that most of its 1 152 formal businesses were impacted by the flooding.

Data from the Google Community Mobility initiative indicates that, on April 13, workplace activity in KwaZulu-Natal was 6% below the pre-pandemic levels. Workplace activity across the rest of the country was, on average, 8% higher, reflecting the negative impact that the flooding had on the province’s business activity relative to the rest of South Africa, PwC said in its 'South African Economic Outlook' report, published on April 28.

The disruption to business and consumer activity in the province has a notable impact on the overall South African economy. KwaZulu-Natal is the second largest provincial contributor to the national economy after Gauteng and had 2.4-million employed workers at the end of last year.

"eThekwini is a large contributor to the KwaZulu-Natal economy, accounting for more than half of the provincial gross domestic product and providing jobs to 1.5-million people. Within this metro lies the Port of Durban, which is the largest harbour and busiest port in the country, handling 60% of total container traffic to and from South Africa," PwC highlighted.

"Manufacturing and transport have been the hardest hit, while costs are still being counted. N3 road transport remains at half the normal volumes as Port of Durban works to clear container backlog. The damage from the floods is much larger and more widespread, with destruction to both public and private infrastructure. The provincial government currently estimates an infrastructure repair bill of R17-billion," it said.

"Business disruptions will add additional pressure to elevated consumer and producer price inflation. Manufacturing and transport combined account for 45% of eThekwini’s economy and 30% of the provincial economy. These are the two sectors that will feel the biggest negative impact on activity in the short- to medium-term.

Further, State-owned logistics agency Transnet estimated that it would take seven weeks to resume operations on its damaged main railway line between Durban and Cato Ridge. Rail operations between Cato Ridge and the north and south coast lines have been halted. The rail, port and pipeline company has among the largest areas of property in the region's flood plain.

Additionally, the Road Freight Association reported that, in the immediate aftermath of the flooding, road traffic between Durban and Gauteng was at half the normal rate. The N3 between Durban and Johannesburg is the busiest road in the country for ferrying exports and imports. Public Enterprises Minister Pravin Gordhan commented that the Port of Durban had a backlog of up to 9 000 containers that would take more than a week to clear, PwC said.

"Supply disruptions caused by a slowdown in port and road traffic and the permanent closure of factories and other places of business due to a lack of insurance or other financial support, will disrupt the flow of food and consumer goods within the economy. While there is certainly no concern about national food security at this stage, there will likely be some short-term negative impacts on the supply of food products and hence higher prices," PwC stated.

KwaZulu-Natal is an important producer of agricultural products. Data from the Bureau for Food and Agricultural Policy (BFAP) shows that up to a third of the national dairy herd is in the province and that more than 10% of the country’s chicken eggs are produced there. The cost of poultry and eggs is already on the rise owing to higher international commodity prices, stemming from the Russian invasion of Ukraine, impacting the cost of chicken feed. The Port of Durban is also a major conduit for the import of foodstuffs.

The disruption in supply of commodities and goods from Ukraine and Russia since February, and currently also from China, resulted in a lengthening of local input lead times during March. This translated into weaker private sector output levels and an increase in order backlogs.

"We now expect local economic growth to slow from 4.9% last year to 1.8% in 2022, under our baseline scenario. Slower growth will be accompanied by higher inflation and a new record-high unemployment rate of 35.6%. Despite this deteriorated growth and employment situation, the South African Reserve Bank is unlikely to slow its planned upward trajectory in interest rates. PwC expects the repo rate to increase by another 0.75 percentage points this year," the company said.

INFLATION PRESSURES
Even before the disruptions caused by the Russian invasion and local flooding, local production costs were already rising quickly. The producer price index (PPI) for final manufactured goods increased by 10.5% year-on-year in February 2022, double the rate measured a year earlier, and averaged 10.3% year-on-year over the past four months, PwC said.

"This was among the highest readings since the introduction of the current PPI a decade ago and also nearly double the ten-year average of 5.5% a year. This underscores the significant supply-side pressure on the inflation environment even before Russia's invasion of Ukraine."

Further, the PPI for intermediate manufactured goods, measuring the cost of factory goods like textiles, chemicals and fabricated metals used as production inputs elsewhere, increased by 19.3% year-on-year in February. Local firms also observed that clients were reducing their demand owing to concerns over rising living costs.

"Consumer price inflation has been elevated since late last year. A combination of base effects and higher commodity prices pushed headline inflation towards the top end of the central bank’s 3% to 6% target range from December 2021 to the present. Headline inflation was most recently measured at 5.9% in March from a reading of 5.7% year-on-year in the preceding two months. This included a 7.2% month-on-month and 33.2% year-on-year increase in fuel prices during March.

"The main driver of this was an increase in international fuel prices, with Brent crude oil prices reaching near $100/bl at the end of February as Russia's invasion of Ukraine ruffled commodity markets. Brent climbed to $130/bl in the second week of March. However, Finance Minister Enoch Godongwana announced in March a temporary reduction of R1.50/litre in the fuel levy included in the basic fuel price.

"Our tax experts have estimated that the relief measures would reduce fuel costs by at least R10-billion over the coming year, and put this money back in drivers’ pockets," the advisory said.

Further, higher overall inflation is increasing trade unions’ salary and wage expectations. Trade unions’ elevated wage and salary expectations add an additional element of cost pressure for South African companies, it added.

However, South Africa can tackle its economic challenges. "We need to choose the areas that will have the biggest impact on gross domestic product (GDP) and jobs growth and where big change is possible without necessarily needing big financial commitments. Key actionable items include improving the electricity situation, ensuring that South Africa has the correct skills base to address the needs of the labour market, and increasing private sector investment," the firm said.

"We estimate that, under a reform-focused scenario, these changes could lift South Africa’s potential long-term economic growth rate from the current 1.5% a year to above 4% a year over the next decade. At a growth rate of 4% a year during 2025 to 2030, the country’s unemployment rate could again fall below the 30% level before the end of the current decade. Now is the time for such a reform-focused agenda to take shape.

"President Cyril Ramaphosa is currently working on a social compact with business, labour, government and social partners to kickstart the economy. However, we are not very optimistic that the full suite of necessary reforms will materialise, even if the compact includes the necessary changes - implementation is always an Achilles heel. As such, our upside scenario, accounting for at least some reforms, expects real GDP growth of 2% a year over the medium- to long-term."

This will see the unemployment rate close the decade at 36.9% and, even under the firm's upside scenario, joblessness will continue rising, the advisory firm said.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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