South Africa is currently experiencing the slowest growth in its modern history, and the country’s growth prospects could push living standards even lower, said Rashad Cassim, the deputy governor of the South African Reserve Bank (SARB).
Speaking at a recent central banking conference in Cape Town (March 14), the deputy governor said the past few years have been remarkable for the country’s economy, but for all the wrong reasons.
“Domestically, we are experiencing the lowest growth period in modern South African history, most recently marked by the widespread failure of basic infrastructure – especially electricity.”
“Externally, we have been beset by a series of extraordinary shocks: the Covid-19 pandemic, the war in Ukraine and a global rise in inflation,” he said.
Cassim said the central bank expects growth rates of 0.3%, 0.7% and 1.0% over the next three years – not a good outlook at all, he added.
“These are disastrously low. Given population growth of about 1.2% per year, the implication is that living standards will continue to fall, as they have on average since 2014,” he said.
Data from Stats SA showed that the tax shedding has had a significant impact on the South African economy, with a seasonally adjusted quarterly contraction of 1.3% in the fourth quarter of 2022.
This figure was three times worse than the market consensus, which predicted a contraction of 0.4% for the period.
This has raised concerns about a possible recession in South Africa due to continued high-level tax cuts, with experts predicting another quarter of the decline in the first quarter of 2023.
Cassim said growth forecasts remain low in light of supply-side dysfunction in the economy and the ongoing blackout.
“We know that electricity shortages have increased; we expect to be affected for 250 days this year from 157 days last year and 48 days in 2021.”
This is a worse outlook than what the Reserve Bank had at its Monetary Policy Committee (MPC) meeting in January, where it expected 200 days of tax cuts in 2023. On this basis, the SARB lowered its growth forecast for 2023 to a paltry 0.3%.
“Furthermore, the freight rail system has, for the most part, not functioned optimally, resulting in the loss of another pillar of the economy’s production potential. There are many other constraints in the economy that are also suppressing potential growth.”
Cassim said it’s best for the bank’s forecasting team to face facts and downgrade projections.
Another battle South Africa faces is that of inflation. As it stands, headline inflation is at 6.9% and core inflation is at 4.9%.
The peak appears to have been in July last year, when headline inflation reached 7.8%.
According to the central bank, this means that inflation has been outside the target range of 3-6% since May 2022, despite continued rate hikes.
SARB now expects inflation to be back in the middle of its target range by the end of this year. The International Monetary Fund has made similar predictions.
Cassim said these forecasts are only encouraging if there are no more shocks to the economy.
The Bureau of Economic Research (BER) has recorded expectations that paint a gloomy outlook for inflation at 6.1% for 2023, up from 5.9%, and 5.6%, up from 5.3%.
Cassim noted that the country could experience more shocks that the central bank would need to adjust to.
“Food inflation is higher than expected, and it surprised us again in the latest release of the consumer price index (CPI) from Stats South Africa.”
“There is a global dynamic for increased food price inflation, but now we are also concerned about pushing food prices down as electricity shortages begin to disrupt food production and storage,” said Cassim.
Cassim added that the exchange rate outlook has also taken a hit recently, despite the US economy heating up and market pricing for more Fed hikes, weakening the rand from around R17 per dollar in January 2023 to over R18 more recently.
In his closing remarks, Cassim said that if inflation did not ease, interest rates would not fall within the markers set by the central bank – with a knock-on effect on prices.
“There are clear risks of adverse developments, which may require further monetary policy action to contain inflation.”
He said while the bank is hoping for a soft landing, it is preparing for the worst.
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