Scenarios point to a gloomy economic outlook for SA

1 Nov 2023

One take-away from Finance Minister Enoch Godongwana’s mini budget is that even the most optimistic scenario for economic growth modelled by the National Treasury is pretty grim.

South Africa’s economy is simply not going to grow at the pace that Finance Minister Enoch Godongwana has long hoped for.

In the Medium-Term Budget Policy Statement (MTBPS) outlined on Wednesday, 1 November, which provides a broad outlook on the fiscal front for the next three years, all the scenarios for growth are grim.

“Economic growth is projected to moderate from 1.9% in 2022 to 0.8% in 2023. GDP growth is forecast to average 1.4% over the period 2024–2026," says the MTBPS, also known as the “mini budget”.

“The global outlook has weakened and risks remain elevated. The weaker outlook for China, lower commodity prices and the risk that US interest rates will remain higher for longer have made the global environment less supportive of South Africa’s growth path.”

Last year the MTBPS estimated real gross domestic product (GDP) growth averaging 1.6% per year from 2023 to 2025, and that was revised down to 1.4% in the February Budget. That is far short of the rates that most economists believe are needed to trigger meaningful job creation and address South Africa’s terrible trifecta of poverty, inequality and unemployment.

“These growth rates are not sufficient to achieve our desired levels of development,” Godongwana pointedly noted in his mini budget speech on Tuesday.

The National Treasury has also modelled two scenarios – A and B – that diverge from the baseline forecast.

“Scenario A assumes economic growth in China slows significantly, causing the terms of trade to deteriorate due to lower export commodity prices and elevated oil prices. Imported inflation pressure triggers further monetary policy tightening, which lowers consumer purchasing power and raises borrowing costs,” the MTBPS says.

“The risk premium rises, further weakening the rand exchange rate. GDP growth stalls in 2024 before rising gradually thereafter. Meanwhile, inflation remains elevated in 2024 and 2025, converging to the baseline by the end of 2026.”

This scenario is seen shaving 0.3 percentage points off growth in 2024 and 0.7 percentage points off by 2026. That would mean that South Africa’s economy would barely grow over the next three years and would not keep pace with population growth, so the country as a whole would become poorer.

It’s also worrying for inflation. The baseline projection is for headline consumer inflation to slow to an average of 4.9% in 2024 from 6.0% in 2023. Scenario A by contrast sees inflation remaining elevated, perpetuating the cost-of-living crisis and further straining household budgets.

That brings us to Scenario B. It sees better growth and inflation slowing faster to the midpoint of the central bank’s 3% to 6% target range.

“Scenario B assumes a further easing of global supply chain disruptions, which reduces inflationary pressure and triggers a reduction in interest rates, lowering borrowing costs. Risk aversion declines, with a lower risk premium and stronger rand exchange rate,” the MTBPS says.

“The purchasing power of consumers rises, while the cost of investment is reduced for firms. Consumer prices ease towards the midpoint of the inflation target range much quicker than the baseline, while growth exceeds the baseline over the next three years.”

That is certainly a better scenario and one that would bring a glimmer of economic hope.

But South Africa’s economy would still not be shooting the lights out. It sees a mere 0.1 percentage point added to growth in 2024, 0.4 percentage points in 2025 and 0.6 percentage points in 2026.

That is still not enough to reach “desired levels of development”. And if it’s the best the South African economy can hope for, then the outlook on a range of fronts such as debt-to-GDP levels, employment creation and poverty reduction will remain sour. DM

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