Enterprise services and advisory company PwC South Africa said its baseline scenario forecasts real gross domestic product (GDP) growth of 1.8% for the country this year, compared with its estimate of 2.5% GDP growth at the start of the year.

Economic growth is facing a myriad of headwinds this year, including a weaker global environment weighing on export potential, a tightening of domestic monetary policy, a further rise in electricity load-shedding and the adverse impact of local and foreign factors on business supply chains, besides other factors, the company said on May 30.

“This is not an isolated deterioration, with a widespread decline in economic momentum across the globe. PwC’s global economic growth forecast for 2022 is now 1.3 percentage points lower than in January,” PwC said in its ‘May 2022 South Africa Economic Outlook’ report.

PwC forecasts real economic growth of 3.7% in South Africa’s key trading partners this year, down from a January projection of 4.7%.

“South Africa’s key trading partners include some of the world’s largest economies, including China and the Euro area. These economies are facing multiple headwinds, including rising interest rates, supply chain disruption, resurging Covid-19 waves, as well as producer and consumer inflation at the highest levels in decades,” said PwC South Africa chief economist Lullu Krugel.

On the local front, the slowdown in economic growth will result in fewer jobs being created. This, in turn, will likely take the unemployment rate to new highs, the company said.

Over the past three months, the main factors disrupting local import supply chains were the Russian invasion of Ukraine, Covid-19 lockdowns in China, flooding in KwaZulu-Natal and increased load-shedding.

“Supply chain pressures are now more intense than seen during the worst of the Covid-19 pandemic and the global financial crisis of 2008 to 2009. This requires companies to evaluate the resilience of their supply chains to continue providing goods and services,” highlighted PwC South Africa senior economist Christie Viljoen.

Inflation remains at the top end of the South African Reserve Bank's target range. Headline inflation measured 5.7% year-on-year in January and February, and 5.9% year-on-year in March and April.

The weaker rand is amplifying the impact of higher commodity prices on imported costs and, ultimately, local inflation. The cost of imports increased notably during March. For example, the cost of fats and oils, a category including sunflower products, which is a key export from Ukraine, increased by 9.4% month-on-month.

“While the transmission of these higher prices from portside to shop shelf will take some time, we can already see the impact from fuel prices on transport costs. For example, the cost of public transport increased by 12.6% year-on-year in April, up from a reading of 10% year-on-year in January before the Russian invasion of Ukraine,” PwC said in the report.

PwC expects inflation to average 6% this year before moderating to a mean of 5% in 2023, which would be the highest two-year average since 2007 to 2008.

EXPORTS

The value of South Africa’s exports reached a record-high in March of nearly R170-billion, rising 10% from the previous month and more than 30% from March of the previous year on the back of higher international commodity prices.

Data from Statistics South Africa shows that prices received on South Africa’s coal exports increased by more than 20% during the first quarter of this year, and export volumes of coal have also increased significantly, PwC said.

Historically, South Africa’s trade deficit has resulted in net exports, which are exports minus imports, being a drag on gross domestic product. In 2017 to 2019, GDP growth was on average 0.6 percentage points smaller owing to the negative impact of this deficit.

Similarly, in 2019, when overall GDP growth was just 0.1%, net exports subtracted 1.1 percentage points from the growth figure.

In 2020, as the local economy was locked down and imports declined by 12% in value, export revenues increased by 7% as local miners and farmers benefited from high internal commodity prices. This resulted in net exports reducing the size of the recession, which was a 6.4% decline in real GDP, by 1.7 percentage points.

Most recently, net exports contributed 0.1 percentage points to economic growth in 2021.

While the positive impact of exports on the GDP calculation is often overturned by the negative impact of imports, export revenues are an important contributor to the local economy, the company said.

“Our analysis shows that, for every R1-million spent in different industries to produce exported goods, the biggest multiplier impact on employment comes from the export of goods related to agriculture and forestry, in particular vegetables, citrus fruit, furniture, wood and wood products, and livestock,” PwC said.

The top ten exports by multiplier impact accounted for 7.6% of export revenues in 2021. This indicates that, while exports play an important role in the local economy, the most impactful export products from a job creation perspective account for only a small share of total export revenues, the company added.

“An increase in exports with a high jobs impact can make an important contribution to help solve South Africa’s unemployment conundrum. To achieve this, such as in the case of agriculture, which produces high-impact products like vegetables, citrus fruit and livestock, some of the solutions are well known.

“In the case of State-controlled network industries, the sector requires improved electricity supply reliability from State-owned utility Eskom, increased efficiency in port operations by Transnet National Ports Authority, and more reliable rail services by Transnet Freight Rail, besides other factors,” PwC said.

The list of requirements to achieve export growth is relevant to many other export-oriented industries, including mining and forestry, and speaks to a broader set of challenges faced by the South African economy. The challenges are, however, not insurmountable and solutions not necessarily expensive, the company said in the report.

An example in the February 2022 PwC South Africa Economic Outlook report suggested that a revised regulatory framework could enable at least 450 MW of a required 4 000 MW increase in power generating capacity to become available immediately, with a further 4 000 MW coming online over the short to medium term.