SA's economic outlook over
the next year: Three steps forward, two steps back
Fin24 – 18 May 2022
SA’s economy has been stagnant for 10 years.
- Stiff global headwinds are forecast for the SA economy, the Bureau of Economic Research at Stellenbosch University heard on Tuesday.
- China, the US and Russia are dramatically affecting global growth.
- BER senior economist Craig Lemboe described the outlook for the economy over the next year as "three steps forward, two steps back".
The Goldilocks days when regulators were able to ensure the global economy was not too hot, too cold but just right, are over as policymakers face an "unprecedented number of obstacles", the Bureau of Economic Research (BER) at Stellenbosch University heard on Tuesday.
Speaking at a BER’s presentation, emerging markets specialist Larry Brainard of global advisory firm TS Lombard said that developments in three key areas – China, the US and Russia – would dramatically affect global growth and create stiff headwinds for the SA economy.
SA’s economy has been stagnant for 10 years and is struggling to recover from the Covid-19 pandemic. The BER has forecast growth of 2.4% for 2022, but says possible scenarios are weighted to the downside, which could see only 1.5% GDP growth.
Brainard said the global environment had created "a pretty dire outlook" for emerging markets.
In China, the impact of the zero-Covid-19 policy, which has seen parts of China in total lockdown, "will deliver a very significant hit to growth this year", said Brainard. While the official government projection is for 5.5% growth, Brainard says he now expects China’s GDP growth to be around 3.2%.
"This is a major, major change to the outlook," he says.
While China needs to rethink its Covid-19 strategy, it is unlikely to do so for political reasons as its leader, Xi Xinping, aims to be elected for an unprecedented third term later this year. It also cannot step up economic stimulus as it has in previous crises because of the number of resources being consumed by local governments to control the pandemic.
Thirdly, the Chinese property sector, which has been running on a kind of Ponzi scheme – funding development with future sales – is imploding, says Brainard, which will impact prices for industrial metals that go into house building.
SA is shielded from falling metal prices to some extent, as coal prices - for which demand has increased - and platinum group metals are expected to stay high. This will partly offset high energy prices resulting from the war in Ukraine.
The second global factor inhibiting growth will be the interest rate hikes by the US Federal Reserve as it struggles to catch up with inflation, which has reached 8%.
"The Fed is behind the curve. Interest rates will have to go up by 4% by mid-year. Our expectations are that the Fed will continue hiking in an economy that is slowing. That is very different from the model that we are used to," he says.
When faced with crisis, the US government has responded with massive stimulus in the past. The outcome this time will be an environment where inflation is high, interest rates are high, and growth is slowing. He says this has important implications for SA, which is also behind the curve in tightening rates. Emerging markets tend to "keep up" with Fed rate hikes to avoid investment portfolio outflows and to anchor inflation expectations.
The third global factor is the war in Ukraine and the resulting spike in energy and food prices. Says Brainard:
"Russia is losing the war and is on track to becoming a third-grade economic power. Food inflation will be the key worry for SA. We are moving into a world of high energy prices, and with Eskom buying diesel, this will be a major hit to the economy."
BER senior economist Craig Lemboe described the outlook for the economy over the next year as "three steps forward, two steps back". While corporate sentiment indicated a slight improvement, with a survey of manufacturers’ indicating an uptick in investment, it will be some time before the structural reforms to the economy takes effect.
With its baseline GDP growth at 2.4%, the BER says "a low-growth scenario" could come about if additional sanctions hit Russian energy, leading to global stagflation. In combination with tighter financial conditions, this could slow growth to 1.5%.
The upside scenario of 2.8% GDP growth could come about if SA can improve railway operation and an earlier rollout of green energy investment. In this scenario, commodity prices will lead to higher export growth, which will prolong the current account surplus, improving confidence and investment.
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