The outlook for 2022 globally – medically, economically and politically – is still highly uncertain and, as a small open economy, South Africa is vulnerable to volatility both at a global level and closer to home, North-West University (NWU) Business School economist Professor Raymond Parsons says.

He notes that, at the global level – notwithstanding significant concerns surrounding the new Omicron variant – the challenge is how to deal with lower growth and higher inflation as many countries grapple with recent economic crosscurrents and costly supply chain disruptions.

Interest rates and monetary policy shifts, therefore, need to be handled in a sensible manner so as not to precipitate ‘stagflation’, Parsons emphasises.

Domestically, the new year represents another inflection point for the country’s economy, he says.

After a likely 5% rebound in gross domestic product (GDP) growth last year, the growth forecasts for 2022 and beyond are conservative – and too low given South Africa’s immense socioeconomic challenges and need for more robust, inclusive growth, powered by much higher levels of public and private investment, highlights Parsons.

He says the dominant challenge is how to remedy service delivery failures at multiple levels of government with a view to boosting confidence and transforming the economy in sustainable ways.

However, he notes that it is possible to ensure that tailwinds prevail over headwinds this year.

Parsons highlights two main economic risks in 2022 as being lower global growth and higher inflation (off an already-high base) – with the possibility of ‘stagflation’ emerging.

“Apart from Omicron and its accompanying challenges, two additional reasons for emerging markets like South Africa to feel vulnerable are the gradual tightening of US monetary policy and a sharp slowdown in the Chinese economy.

“The global commodity boom seems to be over for now (except for some key South African agricultural exports to China, whose prices would suggest otherwise).

“While the US’s gradual ‘unwinding’ of its quantitative easing monetary policy may, for various reasons, be less of a shock to emerging economies now than it was in 2013, most of these economies could still be left with unenviable choices. A hawkish US monetary policy and a strong dollar usually go hand in hand with declining global risk appetite,” Parsons says.

He points out that how emerging economies are impacted and how they respond will also depend on their domestic economic circumstances and resilience.

He highlights that those economies that have China as a major export market must be cognisant that even though the Chinese government is continuing to stimulate its economy, the country’s economic growth rate has fallen to about 5%.

Parsons also notes that the centrality of inflation and how it can best be handled by policymakers are now important elements in international economic policy debates.

However, he says that, thus far, the inflation threat has elicited divided policy responses.

SOUTH AFRICAN ECONOMY

Parsons says the flat performance of total fixed capital formation remains of particular concern as it is upon this that future growth now mainly rests.

“Together with the multi-faceted impact of Omicron, these mixed trends inevitably cast a shadow over growth forecasts for 2022.

“Some key sectors of the economy, such as manufacturing, have been less resilient than others. Fortunately, the ongoing strong performance of the agricultural sector is a major bright spot on South Africa’s economic horizon,” he highlights.

Parsons says growth forecasts for the country by public and private institutions range from 1.6% to 1.9%.

The National Treasury projected in its Medium-Term Budget Policy Statement in November that the growth rate would average 1.7% over the next three years.

Positively, ratings agency Fitch now believes that there is enough economic momentum for the country’s GDP to reach its pre-pandemic level during 2022, whereas the South African Reserve Bank previously expected that it may take up to two years for the country to regain its lost economic ground.

However, Fitch’s assessment of South Africa’s potential growth in the longer term is only 1.1%, although the large, negative ‘output gap’ at present means that actual growth will exceed that level over the next couple of years.

“This disappointing prognosis from Fitch needs to be further interrogated. But the reality is that most of these latest conservative growth prognostications are in any case barely above the population growth rate and are therefore inadequate for a developing economy like South Africa.  

“Policies in 2022 must be geared towards doing better in the face of the socioeconomic red flags raised by these growth forecasts,” emphasises Parsons.

On the inflation front, domestic costs have risen over the past few months, he notes.

Borrowing costs for businesses and consumers are also expected to rise this year, he adds.

WAY FORWARD

South Africa needs to formulate and implement policies that lead as much to efficiency as they lead to justice, Parsons suggests.

He says there must be evidence this year of an implementation-led economic recovery which steadily dismantles the structural obstacles to inclusive growth and job creation, thereby progressively raising the country’s growth ceiling.

A major driver of the investment needed to induce higher levels of growth and job creation is policy certainty, Parsons posits.

“South Africa’s economic performance [in 2022] will largely depend on how well the government and its social partners manage the challenges and exploit the new opportunities, using the policy tools at their disposal,” he says.