The North West University (NWU) Business School’s Policy Uncertainty Index (PUI) increased to 60.9 during the second quarter, from 59.7 in the first quarter, and remains well in negative territory.
This is the highest level recorded since the inception of the PUI in 2016.
The further elevation in the second-quarter PUI, following on the sharp rise in the first quarter, was driven by the continued and heightened global economic unpredictability arising from the Russia/Ukraine war, which also reinforced some persistent domestic policy uncertainties.
However, State-owned power utility Eskom’s blackouts remain the biggest single strategic threat to South Africa's economic performance, the NWU PUI report shows.
After the highly negative gross domestic product (GDP) contraction of 6.4% in 2020, the domestic economy bounced back in 2021 with an economic recovery of 4.9% in GDP last year. The better-than-expected GDP figures for the first quarter of this year reinforced the renewed growth trend, confirming that the economy was then almost back to its pre-pandemic output levels.
Unemployment also appeared to have stabilised at a very high level in first quarter of this year, although it remains unacceptably high.
"The better first-quarter GDP figures, thus, now require that previous growth forecasts of about 1.7% GDP growth for 2022 as a whole be revised upwards. In particular, the welcome but modest recovery in fixed capital formation has the potential to promote further growth and job creation.
"The agricultural sector in particular continues to perform well. Based on the stronger GDP performance referred to earlier, growth in 2022 will probably reach a higher figure in the region of 2.2% this year. This remains inadequate for South Africa's socioeconomic needs, yet does nevertheless offer a positive growth platform," the NWU PUI report said.
Against this background, domestic demand is likely to continue, but the upside will be constrained by rising inflation and interest rates. Recent high-frequency economic data such as manufacturing and mining production figures have been disappointing.
As economic activity has been steadily normalised post-Covid-19 and the remaining Covid-19-related restrictions having been removed on June 22, a further recovery in the tourism and hospitality sectors will occur. Retail sales in April also exceeded market expectations by a large margin, the PUI report pointed out.
"However, as 2022 unfolded, serious storm signals have also been raised, externally and internally, which have created downside risks to the economic outlook. Globally, these include growing concerns about global ‘stagflation’, which is high interest rates combined with slow growth and high inflation, the continued economic impact and disruption of supply chains resulting from the Russia-Ukraine war, and the current pace of tighter US monetary policy with the possibility of a serious recession there. Generally, the global environment is less favourable to domestic growth."
Further, domestically, recent downside risks to the growth outlook have arisen from uncertain elements, including persistent Eskom load-shedding, escalating cost-inflation, how quickly the economic damage caused by KwaZulu-Natal’s floods in April would be repaired, persistently weak business and consumer confidence, continued local government delivery failures and progressively higher borrowing costs for business and consumers as the South African Reserve Bank’s (SARB's) interest rate-raising cycle continues.
"Consumer price inflation headline inflation at 6.5% in May is likely to elicit a more aggressive monetary policy stance from the SARB later this month. Eskom’s load-shedding in particular continues to loom large over South Africa’s economic activity," the NWU PUI report said.
Meanwhile, another source of uncertainty on the political front may flow from political developments arising from factionalism and related developments in the governing African National Congress (ANC) party leading up to its electoral conference in December.
The concern is that volatile ANC politics over this period may delay the implementation of key economic reforms, the report warned.
"Externally, the Russia/Ukraine conflict is likely to be a protracted one and the immediate global implications for the South African economy appear divided in three broad uncertain ways: the expected slowdown in the world economy, the negative impact on food and energy costs, and the net advantage that higher commodity prices may have for South Africa," the report said.
"The second-quarter PUI outcome reflects the present high level of uncertainty arising from negative global and domestic factors that dominated the positive ones. If South Africa wants to better manage the new balance of risks, absorb the pressures, exploit any new opportunities, and offer a clear sense of economic direction, it must concentrate mainly on the factors within its control.
"The challenge will be for economies like South Africa to craft and implement economic strategies that build resilience and can help to offset global headwinds," the NWU PUI said.
Further, even as a small open economy, South Africa has some cards to play. Government finances are in better shape to underpin the economy with appropriate anti-cyclical policies and projects, which can strengthen economic resilience.
Escalating fuel costs can be further tempered while simultaneously tackling a review of the fuel price structure. Additionally, with the remaining Covid-19 restrictions lifted on June 22, there are gains for the important tourism and hospitality sectors.
"South Africa must, therefore, build on the remedies and growth positives that are available. The rest of 2022 must thus see South Africa expedite the implementation of existing half-forged policies and projects that will assist in reducing economic uncertainty, strengthening investor confidence and facilitating a policy environment that is solid, coherent and consistent," the PUI recommended.