As the year winds down on a sour note, South Africa’s economy could be faced with a tougher 2023 as the outlook remains subdued after going through a turbulent 12 months.
The year 2022 was characterised by a number of global and domestic headwinds, such as imported inflation, record levels of load shedding, industrial action, and political instability, which combined to progressively slash the annual growth forecasts to less than 2% this year.
It was a damp squib performance as the economy was expected to hit the right notes and recover significantly from the devastating Covid-19 pandemic impact.
Oxford Economics Africa senior economist Jee-A van der Linde on Thursday said the probability of an economic contraction in South Africa next year had risen.
Van der Linde had forecast real gross domestic product growth of around 1.0% in 2023, with risks skewed to the downside, saying South Africa was not able to fully exploit favourable commodity export price developments by boosting mining production due to a host of factors this year.
“Current conditions are far from ideal. Looming recessions in several major economies pose downside risk,” Van der Linge said.
“Labour strikes and sporadic power outages, together with cable theft, sabotage, and breakdowns, made 2022 a stop-and-go year for the South African economy.”
South Africa remains a small, open economy and will be negatively affected by weakening global growth.
Although there is some underlying resilience in the economy, Van der Linde said consumers would be under pressure as a result of elevated costs for goods and services and rising interest rates.
He said the latest political developments in South Africa had precipitated a definite risk-off environment.
“Markets have been caught off guard by damning findings against President Cyril Ramaphosa in relation to the so-called Phala Phala scandal,” he said.
“An uncertain political environment will likely thwart foreign investment, as decision-makers are distracted from following through on key business reforms.”
Kicking off 2022 was a disruptive war in Ukraine by Russian forces in February against the expansion of the North Atlantic Treaty Organization (Nato) into eastern Europe.
More than a humanitarian crisis, the invasion of Ukraine triggered one of the worst global inflationary crises in modern history, with food prices escalating to their highest in decades as exports of grains and seeds ground ARB to a halt.
Accompanying this was fuel shortages after Western countries imposed severe sanctions on Russia - one of the world’s largest oil exporters - to which Russia then retaliated with its own restrictions on natural gas supply to Europe.
Petrol prices in South Africa breached the R25 mark per litre for the first time in history in April, triggering the government to implement a R1.50 per litre temporary reduction in the general fuel levy to support struggling motorists until the end of July.
This saw inflation in South Africa escalating to 13-year highs, peaking at 7.8% in July, crossing the upper limit of the South African Reserve Bank (SARB) target range of 3-6% for the third consecutive month.
Rising inflation and aggressive interest rate hikes in the US also weakened the rand, which touched R18.40 to the US dollar in October, but the Phala Phala sent the currency into a tailspin later in the year.
The broadening of inflationary pressures meant that swift and decisive policy action had become imperative, and the SARB adopted an aggressive monetary policy stance, hiking interest rates by a cumulative 200 basis points to 7% by the end of the year.
The SARB has acknowledged that the current inflation surge had its roots in the highly expansionary policy actions taken to minimise the adverse effects of the Covid-19 lockdowns.
It said that with the benefit of hindsight, the lockdown restrictions were too expansive and extended for too long.
SARB Governor Lesetja Kganyago told investors at the JSE/NYSE Market Close Event in October that the domestic economy was hit by multiple and often overlapping shocks, some positive and some negative.
“For instance, the strong global growth in 2021 supported South Africa’s terms of trade and thus its growth. Russia’s invasion of Ukraine provided impetus to South Africa’s commodity export prices, lifting growth in the first quarter of 2022,” Kganyago said.
“However, these positive global shocks are fading, shifting us back into more usual conditions.”
In spite of this, 2023 could see inflation and interest rates surprise lower than currently expected as prices are softening in global markets though risks remain for growth.
The latest data from Statistics South Africa has also revealed that consumers are poorer than they were last year due to the cumulative impact of interest rate increases, elevated inflation and persistent load shedding.
Although the size of the economy now exceeds pre-pandemic levels, unemployment levels have remained stubbornly high at 32.9% as personal services and electricity, gas and water supply industries suffer from rolling power cuts.
The energy crisis has worsened to Stage 8 load shedding as the year comes to an end as Eskom is scheduled to take the 920MW Unit 1 Koeberg Nuclear power station off-line for six months while it has run through its R12 billion budget for diesel for emergency power.
This has seen the business industry calling for the head of Eskom’s CEO and the government to take decisive action as ongoing blackouts threaten investment and job creation.
Politically, investors are crossing their fingers that the Constitutional Court will find against the Section 89 Phala Phala report and thus solidify Ramaphosa’s base ahead of the ANC elective conference, allowing for a strengthened hand in 2023.
Investec chief economist Annabel Bishop said they believed a Cabinet reshuffle would occur next year, and Ramaphosa would use this to remove opponents to his economic policies and reforms, which would allow a speedier implementation of the repair of the structural reforms.
“Such an outcome would allow South Africa to see rapid implementation of reform to the electricity, rail and ports, as well as water infrastructure, bolstering economic growth, State revenues and economic stability,” Bishop said.
“An impeachment, however, would destabilise the country and risk miring the economy in another lost decade as occurred under RET leadership over the 2010s.”
However the year ends, one thing that is certain is that 2022 has not been smooth sailing for the economy and consumers as global headwinds have ensured that activity remains moribund.
BUSINESS REPORT