SA’s economy in 2023 - slow growth and high food prices create a perfect storm

27 Dec 2022

That’s not the only bad news for the economy in 2023. South Africans will remain at the mercy of Eskom rolling blackouts and government decay will continue to make doing business costly and difficult.

Yet there are a few rays of light piercing the coming storm. Inflation should brake further and President Cyril Ramaphosa has more political space to pursue economic reforms, having clinched a second term as president of the governing ANC.

More private sector energy investment is certainly on the cards, and the agricultural sector remains buoyant. And brisker-than-expected economic growth in the third quarter, of 1.6%, heralds the promise that the economy grew as much as 2.5% in 2022, far overshooting initial expectations.

However, that performance will not be repeated in 2023. Global economic growth is seen sharply slowing in 2023 as Russia’s war in Ukraine stumbles along, interest rates rise to curb inflation, and China struggles to contain the Covid pandemic.

In October, the International Monetary Fund cut its 2023 world economic growth forecast to 2.7% from 2.9%, and in November it said the outlook had become “gloomier”. Forecasts from banks and other financial institutions have been even bleaker.

“The global economy is projected to expand at a sluggish pace of about 1.6% in 2023 as financial conditions tighten, the winter aggravates China’s Covid policy and Europe’s natural gas problems persist,” investment bank JP Morgan said in early December.

“The global economy is not at imminent risk of sliding into recession, as the sharp decline in inflation helps promote growth, but a US recession is likely before the end of 2024.”

In South Africa, inflation will also probably slow after peaking in July at a 13-year high of 7.8%, but domestic growth is unlikely to get much of a bump from that. Although consumer inflation braked to 7.4% in November from 7.6% in October, food inflation in the year to November rose to 12.8% from 12.3%.

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Food prices are expected to remain elevated in 2023 because of the war in Ukraine and the impact of a third year of La Niña weather patterns.

Food inflation will continue to eat into the household budgets of poor and working-class households, leaving them with less income to spend on other things, or for saving.

Meanwhile, the South African Reserve Bank is expected to maintain its hiking cycle, though at a slower pace, after raising interest rates by 350 basis points since November 2021, taking the prime lending rate to 10.5%. This will limit consumer expenditure across income and class lines while making debt burdens more onerous for companies.

South Africa’s failing state will also continue to take a toll on the economy. Eskom is not seen as getting any better in 2023 after load shedding reached record levels in 2022.

“During the third quarter of 2022, load shedding reached an all-time high of 1,054 hours, or 47.7% of the time (an average of 14.8 calendar days per month),” the central bank said in its Quarterly Bulletin in December.

An industrialised economy simply cannot grow meaningfully or attract significant investment without a reliable, and preferably cheap, supply of power.

The presence of the military at Eskom power stations is also testimony to the failure of the state to provide effective security on many fronts – a failure that also has an economic price.

Eskom’s continuing woes will hasten private sector investment in renewable alternatives, from households to corporates. This is a de facto privatisation of power generation and a gradual move away from coal. But most households and many small businesses simply cannot afford this option and will remain at the mercy of Eskom’s slide.

Speaking of state failure, Transnet will probably continue to come off the rails, curbing the mining sector’s ability to export the commodities it extracts at a time when slowing global growth may take the shine off the prices of many minerals and metals.

And there are no signs that the decay of other state services, such as water provision and road maintenance, will be arrested anytime soon. This makes doing business increasingly difficult and costly.

Ramaphosa’s newfound political grip on the ANC does provide the chance for a reform agenda to get off the ground, such as curbing ballooning government debt levels and hastening the drive to tap renewable sources of energy.

The dysfunctional Department of Mineral Resources and Energy may finally acquire a functioning mining cadastre to replace its useless Samrad system that created a massive backlog in applications for mining rights and cast a suspicious fog over the process, thwarting badly needed investment in the sector.

But there is no policy panacea that can suddenly spur much faster rates of economic growth in 2023, or attract truckloads of new investment at a time when the private sector will be prudent in its allocation of capital. Official growth forecasts for 2023 of about 1.9% can be expected to be cut, if not slashed.

Against that backdrop, prospects for significant job creation remain grim. This will further entrench already glaring disparities of wealth and income and stoke social tensions that elements in the ANC’s dispirited and desperate “radical economic transformation” wing will be eager to gin up.

The political environment remains a fertile one for unrest, which is hardly conducive to a growing and vibrant economy.

So, expect the lights to dim further as 2023 advances and the economy struggles to gain traction. A perfect storm of economic calamity is brewing, threatening to rock the tepid recovery from the pandemic and lockdowns. Agriculture may provide some green shoots, but it accounts for less than 3% of GDP.

We can only hope for a new economic dawn to really break in 2024. Right now, the sun is setting.

There is no policy panacea that can suddenly spur much faster growth or attract truckloads of new investment.

And official growth forecasts of about 1.9% can be expected to be cut, if not slashed. DM/BM

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