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PwC estimates South Africa’s economy will grow by 2.5% this year

LONDON, (The Southern African Times) – Advisory multinational PwC expects the South African economy to grow by 2.5% this year, while the direct impact and lasting effect of the unrest in July could reduce gross domestic product (GDP) growth by 0.8 percentage points this year. 

The R38.9-billion fiscal support package announced on July 29 should, however, bolster economic growth by up to 0.7 percentage points, it states.

The disruption in the global economy during 2020 owing to the Covid-19 pandemic continues to induce aftershocks that impact the economic recovery in some parts of the world. For example, empty shipping containers are stranded in less-frequented ports, while there have been shortages on busier routes, PwC said in its ‘South African Economic Outlook’ report published this month.

“Amid the strengthening global recovery, commodity prices are expected to increase at a significantly faster pace. Oil prices are expected to rise close to 60% above their low base in 2020. Non-oil commodity prices are expected to rise close to 30% above 2020 levels, reflecting particularly strong increases in the price of metals and food,” the report states.

South Africa’s key trading partners are expected to see strong economic growth in 2021 and 2022. The South African Reserve Bank (SARB) forecasts an aggregate real GDP growth rate of 6.1% in South Africa’s major trading partners this year.

Rising export revenues have been a highlight of the local economic recovery since late last year and should continue to support the domestic economic recovery.

Meanwhile, South Africa is lagging behind its emerging market peers in the roll-out of Covid-19 vaccinations. By the end of July, the country had fully vaccinated only 4.8% of the population, or 2.8-million adults. A further 10.1%, or 5.9-million, had received one of their two Pfizer doses, as the country ramped up its vaccine rollout.

“However, despite the accelerated vaccine roll-out over the past several months, the third wave remains severe. By August 8, South Africa had 160 678 active Covid-19 cases. While this number was lower than a recent peak of 211 052 on July 10, it was up from 140 341 on July 27.”

PwC’s economic scenarios for this year are strongly influenced by different perspectives about the third wave of Covid-19 infections, the firm said.

Meanwhile, stakeholders are increasingly demanding transparency and commitments from firms to help solve societal challenges. The world is in the midst of an asymmetrical economic recovery. In some countries, Covid-19 infection rates have fallen significantly, while the virus remains difficult to control in others.

Whether governments are actively managing outbreaks or returning to normalcy, economic recovery is central to their forward-looking agenda because, without a broad-based economic expansion, it is difficult to address other challenges.

Unemployment in South Africa fuels unrest, but limited employment growth is forecast for this year. Joblessness fuelled July’s unrest, with South Africa’s unemployment rate among the highest globally, the firm said in its report.

“Much of the unrest that swept through KwaZulu-Natal and parts of Gauteng was not driven by direct political issues, but instead stoked by the country’s long-term challenges of poverty, inequality and unemployment. According to Trading Economics, South Africa’s narrowly defined unemployment rate, most recently measured at 32.6% in the first quarter, is the third-highest globally after Bosnia and Herzegovina at 32.7% in May and Nigeria at 33.3% in the final quarter of 2020.”

From another perspective, the Bureau for Economic Research (BER) ascribed the unrest to unmet expectations among South Africans about their financial well-being. Based on data collected for its Consumer Confidence Index (CCI), the BER notes that, since the global financial crisis, South Africans expected improvements in their personal finances that did not match their weaker expectations for overall economic prospects.

“The CCI data shows that, during the first half of this year, lower- and middle-income earners were expecting meaningful improvements in their financial situation. Essentially, South Africans were expecting the economy to improve on the country’s unemployment challenges. It did not,” the PwC team said in the report.

The damage caused by the unrest in KwaZulu-Natal and Gauteng is still being calculated, with some estimates as high as R70-billion. The State-owned South African Special Risk Insurance Association (Sasria), which is the only local insurer that covers claims caused by riots, civil unrest and terrorism, and vandalism caused by public disorder, is expecting claims of up to R20-billion from businesses that have incurred damages to their insured property.

Aside from damage to physical infrastructure, there was a significant adverse impact on broader supply chain activity. For example, fleet management service provider Netstar reported that more than three-quarters of the trucks in KwaZulu-Natal cancelled or delayed trips during the unrest.

The Absa Purchasing Managers’ Index (PMI) plunged from 57.4 in June to 43.5 in July, a level last seen in May 2020, owing to the unprecedented incidents of looting and arson as well as the severe Covid-19 third wave and associated level 4 lockdown.

These factors impacted the supply and demand side of manufacturing activity and pushed the PMI’s business activity index to the lowest on record when excluding last year’s period of level 5 lockdown in April 2020.

Considering the economy more broadly, the IHS Markit South Africa PMI, which measures activity in agriculture, mining, manufacturing, construction, wholesale, retail and services, also noted a marked downturn in business activity and buying demand amid the unrest and heightened lockdown restrictions.

“We estimate that the direct impact and lasting effect of the unrest in July could reduce GDP growth by 0.8 percentage points this year. This is a big impact but not unexpected considering that the hard-hit KwaZulu-Natal and Gauteng economies represent half of the country’s GDP. We have not yet assessed what the long-term negative impact on business confidence and investor sentiment will be from the damage to physical infrastructure.”

Further, after slightly adjusting their inflation forecasts, the SARB Monetary Policy Committee (MPC) said in July that the risks to the inflation outlook “are assessed to the upside”. This means policymakers currently see the upside, or negative, risks to inflation forecasts being stronger than the downside, or positive, factors. They also acknowledged the rise in inflation expectations.

“Based on these projections, a recently weaker exchange rate, higher domestic import tariffs, as well as escalating wage demands, the central bank warned of higher inflation risks over the medium to long term. The MPC expects inflation to average around the midpoint of the inflation-target range towards 2022.”

The PwC team is aware that the 2.5% figure for 2021 is at the lower end of the range of forecasts currently available. For example, the SARB said in July it expects the economy to grow by 4.2% this year.

However, the central bank admitted in its latest MPC statement that recent unrest, the impact thereof on the vaccine drive, a longer-than-expected lockdown, limited energy supply, or load-shedding, as well as policy uncertainty “pose downside risks” to economic growth.

“It is likely that the major difference between the SARB’s current forecasts and our own projections is that PwC has already incorporated more adverse impacts from these downside risks into our assumptions. For example, we already account for this year’s load-shedding being of the same magnitude as experienced during 2020.”

“We think the SARB is currently too positive with regards to the economic outlook and that GDP growth in 2021 will be below their expectations.

“As the release of monthly data for the third quarter reflects a shock to the economy from the recent unrest, PwC expects the central bank to revise lower its projections for 2021/22 when the MPC meets again in September and November. This will likely see the MPC modelling move the first interest rate hike out to the first quarter of 2022, the timing of this has been our baseline view for quite some time, and for fewer upward adjustments next year.”

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