The research team of financial services firm Nedbank has predicted that South Africa's economy will grow by 2% this year, although the recovery will be uneven for industries.
In addition, load-shedding more severe than Stages 1 and 2 could reduce growth by 20 basis points, it cautions.
The country's medium-term growth potential remains at 2%. However, there remain downside risks in the form of Covid-19 and the uncertain nature of further variants and waves. The impact of the fourth wave, from which South Africa has mostly emerged, and the related international restrictions, contributed to lowering the expected growth by ten basis points, says Nedbank economic research analyst Reezwana Sumad.
"The faster we can return to normality and lockdown restriction end, the more likely consumers are to spend on services-related consumption, which will likely result in a slight uptick in the services, retail and wholesale industries," she says.
Further downside risks to growth forecasts include global growth for 2022 being revised marginally downward by international finance organisations the World Bank and the International Monetary Fund (IMF).
The research team also found that, compared with pre-pandemic levels, construction, trade and catering are 20% down and the worst affected industries. Only the finances, financial services and personal services industries are emerging slightly above pre-pandemic levels.
"We believe gross domestic product (GDP) will likely revert to 2019 levels during the second half of this year, or by mid-year, but industries such as construction, manufacturing and transportation are likely to take much longer to recover from the pandemic impacts, and may struggle to go back to pre-pandemic levels of GDP, even by the end of next year," says Sumad.
Nedbank expects inflation to tick up over the medium term, and has forecast 4.4% for 2022, but this is highly dependent on the oil price and administered prices as a whole, and there remain further upside risks to inflation estimates. Nedbank expects 2023 inflation to be 5%, says Sumad.
"We expect a cumulative 75 basis points of hikes this year to 4.5%, in three 25 basis points increments, and a further two 25 basis point hikes throughout 2023 to culminate at 5%. We expect the South African Reserve Bank (SARB) to remain hawkish, as evidenced by its language in monetary policy statements, and in lock-step with US Federal Reserve Bank moves to preserve capital flows, in the context of rising inflation and rising inflation expectations and severe upside risks."
Part of the reason for the tepid hiking cycle reflected by analysts consensus is that, given the low growth rate, the economy cannot withstand an aggressive cycle of hikes.
This is much less than the pace of hikes projected by SARB and forward rate agreements (FRA) markets, which project 350 basis points of hikes to the end of 2023 and 200 basis points of hikes over twelve months. There has been a divergence in forecasts of rates between SARB, FRA markets and the analyst community, she says.
"The SARB needs to maintain its hawkish language to maintain inflationary expectations over the medium term," Sumad adds.
Further, there are a few risks to inflation, including oil prices, which have risen dramatically over the past few months. The SARB forecast is based on an oil price assumption of $72/bl, while Nedbank's forward curve places the oil price closer to $82/bl.
"If the oil price continues at current levels or extends gains for more than a month, we can add between 20 and 30 basis points upside pressure to inflation estimates, and this will also culminate in higher local fuel prices," she says.
Additionally, local import prices remained deflationary over the past year, but Statistics South Africa figures indicate that import inflation is increasing.
"Import inflation has been kept quite low, particularly in terms of imports of goods and food, but import inflation does threaten to increase and adversely impact food inflation. We have forecast food inflation of 5.8% during this year, but there is a risk it can breach the 6% mark, as it did most of ," Sumad adds.
A key risk in terms of growth expectations for South Africa is the growth of its largest export market China, which consumes more than half of South Africa's mineral exports and is a key strategic trading partner. Growth in China is expected to slow from more than 8% to 6% this year, and any material slowdown in China will adversely impact on South Africa's trade balance.
A decline in China's GDP growth will lead to a decline in demand for South African exports, which will impact on trade, the trade balance and the mining and manufacturing industries. This will also reduce growth expectations, as consumption deteriorates, she says.
"We have also seen the plateauing and slight easing of commodity prices, which means the expectations in terms of value of exports has been revised slightly lower, owing to the combined slight easing in global growth expectations and potentially lower demand from global trade partners, lower commodity prices and the high base of 2021."
Meanwhile, labour has been hard hit during the pandemic and more than two-million jobs have been lost over the past two years, with the bulk being in the formal sector and within some secondary industries, Sumad says.
"We think it will take longer for employment to recover because, with a base incremental employment growth of 2% year-on-year, which is in step with the SARB's forecast, it will take three to five years to recover to pre-Covid-19 levels of employment.
"From an employment perspective, without improvements in effecting structural reforms and increasing infrastructure spending to increase the potential growth, we believe employment will struggle and the unemployment rate is expected to remain elevated above 30% for several years," she says.
While there are a few government interventions to mitigate this challenge, including public works programme that help to upskill youth and provide temporary employment, the big focus should be on infrastructure spending. Although infrastructure spending is the second-fastest-growing expenditure item, structural reforms to facilitate infrastructure development will take time and infrastructure projects will take at least three years to make a difference in employment and contribute positively to GDP, Sumad says.
"We believe infrastructure investment will contribute to employment, but we will only see the benefit of such investments within three to five years, and even maintaining 2% year-on-year growth in employment is insufficient to reduce the unemployment rate."