Ray of light shines at the end of dark tunnel for SA economy

Johannesburg – Like many, the Covid-19 pandemic has severely disrupted our personal lives.

As economists, it has also challenged our ability to forecast economic variables.

As we prepared for our recently published 13th South Africa Economic Update, developments in the Covid-19 pandemic led us to revisit our outlook for South Africa’s key economic variables many times.

The current global outlook is looking better after last year’s collapse and in this update, we show that South Africa is positioned to grow at the fastest pace in over a decade, bouncing back from last year’s 7% contraction.

In this update, we project economic growth to rebound to 4 % in 2021.

However, there is considerable uncertainty around this forecast. At the beginning of the year, just out of a summer break and as South Africa was battling its second wave of Covid-19 infections, the prospect for an economic rebound in 2021 appeared limited.

A few months later, high commodity prices, sustained external demand, and higher domestic output and sales on the back of activity normalisation seemed to promise a stronger recovery.

Last month, as Covid-19 infections spiked and we isolated again, uncertainties about the duration and severity of the third wave raised questions about economic growth this year again.

Just as we launched this update, social unrest and looting that resulted in destruction of businesses cast another shadow on economic prospects. The unusual level of volatility in the economic cycle makes it hard to project short-term developments.

However, what is at stake is not growth this year, it is growth over the next 10 years and beyond. The 2010 low-growth decade translated in weak progress in improving living standards for South Africans compared to other emerging countries.

The events over the last few weeks have reminded us how urgent it is to create the conditions for higher and more inclusive growth that benefits all South Africans.

However, without significant policy action, constraints such as electricity shortages, and transport and logistical costs and bottlenecks will almost certainly continue to weigh on private investment and economic activity.

We project that economic growth would return to around 1.5% by 2023, which would not be enough to improve economic and social outcomes following the pandemic.

As the Covid-19 crisis compounds socio-economic challenges, while managing the pandemic, it is critical not to lose sight of actions that can improve the potential of the domestic economy.

The reforms needed to unlock South Africa’s growth are well-known.

They have also been recognised by the government. Recent announcements to address some of them (SAA, electricity generation, ports) are very important steps.

Such reforms are needed to restart private sector investment, create more jobs for the growing working-age population, and take advantage of the global recovery.

On the fiscal side, the higher-than-expected revenue last year – and the possibility that it happens again this year – should not distract us.

Some relaxation of the constraints in the short term should not translate into longterm commitments that will become a problem when the cycle enters a different phase.

Resources still must go where they can have the highest developmental impact and be spent efficiently. Rebuilding fiscal space is critical to maintain government’s ability to respond to shocks in the future.

At the moment, the favourable global environment presents an opportunity for the government to make difficult policy choices in a situation where the global recovery supports SA growth.

This can help smooth the adjustment needed and, combined with reforms, increase confidence in the country’s outlook.

By Benedicte Baduel and Dumisani Ngwenya.

• Baduel and Ngwenya are economists at the World Bank.

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