South Africa, while struggling with short-term demands of expanding the social wage or safety net for those that would have missed being absorbed into the economy, should pursue long-term economic growth and employment creation, which has not received much attention and has generally fluctuated along with global markets and commodity cycles, says professional services multinational KPMG South Africa lead economist Frank Blackmore.
The company's chief economists in various countries globally this week released 'KPMG Global Economic Outlook' papers, which provide detailed insights into the global obstacles and opportunities, including, surprisingly, that major economies are shifting their mindset and focusing increasingly on the potential risks and rewards of a more sustainable long-term recovery and route to sustainable growth, despite the pandemic not being over.
“If we look at South Africa in the global context, there is no doubt that we need to consider a growth mandate. If we look at the US, China and Japan, for example, the economic outlook is positive, driven by consumer spending, industrial production and easing of supply chain disruptions, among other factors.
“Similarly, India, which is most closely aligned to South Africa, has seen a rapid increase in vaccine coverage; related, benign, monetary and financial conditions; and buoyant external demand, which is pushing it towards a more rapid economic recovery,” Blackmore says.
South Africa is, however, in a largely different position, having historically had the challenge of needing to focus on the long-term goal of economic growth and employment creation, while needing to deliver on the short-term goal of expanding the social wage or safety net for those that would have missed being absorbed into the economy, he points out.
The short-term goal of expanding the social wage has generally dominated the government’s agenda, with a rollout and subsequent expansion of a social grant programme to the point where more people receive a social grant than are employed.
Such a strategy may work if economic growth is driving employment creation and the broadening of the tax base, but this has not been the case in South Africa, where the tax base has been reduced over time, resulting in increased pressure on the public sector balance sheet, he notes.
“If we look at 2021, the expected lower growth would be the negative impact of the civil unrest experienced in two provinces in July, costing South Africa billions of rands in damages and infrastructure losses that are likely to require an extended period of time to rebuild, if ever.
“Further, the muted growth expectations may also be caused by the shared international factors impacting domestic growth expectations including ongoing supply constraints and possible further economic restrictions at home or abroad brought about by the pandemic,” Blackmore says.
“The expected rate of economic growth in 2021 and 2022 would not be sufficient to tangibly reduce the high unemployment rate of 34.4% currently being experienced in the country. A national strategic growth mandate would need to be implemented along with the eradication or reduction of domestic barriers to growth and doing business to attain an economic growth rate that would make noticeable inroads into unemployment,” states Blackmore.
While South Africa continues to slowly reopen its economy and the number of vaccinated people grows, inflationary pressures for 2021 and 2022 remain cost-push in nature as aggregate demand still lags below its potential level. The main drivers of forecast consumer inflation are local energy prices, including both fuel and electricity prices, as well as food prices.
The increase in commodity prices, including oil, has meant rising imported fuel prices from the Covid-19-induced lows experienced in the first half of 2020. Energy supply, and in particular electricity, remains an ongoing concern for South Africa. In addition, the remaining fleet of power stations are old with maintenance frequently required and costly to undertake. To fund this, the State-run power provider regularly requires additional tariff increases that underpin the increasing energy prices, he says.
“Constrained aggregate demand combined with a general appreciation of the local currency on the back of commodity price increases and attractive domestic bond yields has, nevertheless, meant that the inflation rate is expected to remain contained within the central bank’s target range of 3% to 6% over the forecast period 2021 and 2022, as indicated by the Monetary Policy Committee decision to increase the repo rate by 25 basis points.
“In 2022, sustainable higher rates of long-term growth are expected to remain elusive with vaccine roll-out delays limiting the economy’s ability to reach full capacity, and there is no doubt that, as a country, we need to start working smarter by ensuring we are driving core agendas to growth and creating room for opportunity where it matters most, if we hope to level with global economies and truly see recovery in the year to come,” Blackmore notes.