Looking into a crystal ball – the South African Economy in 2022

WHAT 2022 has in store for us is highly uncertain. As a small, open economy, South Africa is vulnerable to volatility both at a global level and closer to home.

Domestically, the new year represents another inflection point for the economy. After a likely 5% rebound in GDP growth in 2021, the growth forecasts for 2022 and beyond are conservative – and too low given SA’s immense socioeconomic challenges.

The year 2021 was another tough year for the country. Low points include the widespread civil unrest in July, extended periods of Eskom load shedding, intermittent Covid-related lockdowns, the announcement of record-high unemployment figures, the emergence of Omicron and the imposition of various international travel bans on SA.

The rapid spread of Omicron across the world is a grim reality, bringing with it additional economic risks and disruptions.

In a world that has grown weary of Covid-related restrictions, new lockdown measures are nevertheless being introduced in various countries. Two of the most obvious economic risks in 2022 are now lower global growth and higher inflation (off an already-high base).

Apart from Omicron and its accompanying challenges, two additional reasons for emerging markets like SA to feel vulnerable are the gradual tightening of US monetary policy and a sharp slowdown in the Chinese economy. The global commodity boom seems to be over for now (except for some key SA agricultural exports to China). While the US’s gradual unwinding of its quantitative easing monetary policy may, for various reasons, be less of a shock to emerging economies now than it was in 2013, most of these economies could still be left with unenviable choices. A hawkish US monetary policy and a strong dollar usually go hand in hand with a declining appetite for risk in global investment markets. Recent developments have given greater prominence to global inflation trends and the interest rate outlook. Interest rates have been raised in several countries.

As the world moves into the third year of the pandemic, it is not necessarily all gloom and doom. Adaptive behaviour on the part of people, firms and governments – as well as more vigorous vaccination drives – can help to alter the future trajectory of the contagion.

There are also signs that supply bottlenecks may be easing while manufacturing hubs are beginning to show quicker delivery times. Even in the face of some predicted worst-case scenarios, the world economy is not expected to experience another massive contraction in GDP growth, as was witnessed at the start of the pandemic in 2020.

Although real economic activity in SA in 2021 as a whole is likely to deliver a growth rate of about (or just under) 5%, there was nevertheless a setback in the third quarter when GDP growth declined by a higher-than expected -1.5%. This contraction, if seen together with the record unemployment figures, confirms the serious damage done to the economy by factors such as the large-scale civil unrest and persistent Eskom load shedding.

The Covid-19 pandemic has, also over time, exacted its economic toll on businesses, especially SMEs.

The flat performance of private and public-sector investment remains of special concern as it is upon this that future growth now mainly rests.

Some key sectors of the economy, such as manufacturing, have been less resilient than others. Fortunately, the ongoing strong performance of the agricultural sector is a major bright spot on SA’s economic horizon.

Growth expectations for SA in 2022 have ranged from a pessimistic 1.4% to a more optimistic 2%. The Medium-Term Budget Policy Statement in November projected an average growth rate of 1.7% over the next three years.

Most of these estimates are barely above the population growth rate and are therefore inadequate for a developing economy like SA. Policies in 2022 must be geared towards doing better in the face of the socioeconomic red flags raised by these forecasts. On the inflation front, Consumer Price Index inflation has risen over the past few months, driven mainly by the recent surge in fuel and raw material costs and higher food and electricity tariffs.

In November, the SARB’s Monetary Policy Committee (MPC) raised interest rates by 25 basis points (0.25 percentage points) because of concerns about the upside risks to inflation. This came after a prolonged period of relatively low-interest rates.

The MPC also signalled the likelihood of a collective hike of 100 basis points (one percentage point) by the end of 2022. Borrowing costs for businesses and consumers are, therefore, destined to rise.

Robeco strategist Peter van der Welle offers a useful distinction between “good, bad and ugly inflation”. “Good inflation,” he says, is the non-accelerating type that coincides with an economy that is operating in equilibrium. “Bad inflation” is what he currently sees reflected in global supply-chain bottlenecks. “Ugly inflation”, which is what must worry central bankers the most, produces a wage-price spiral.

This framework is relevant in the SA context.

The IMF includes SA in the group of emerging economies whose inflationary expectations showed signs of being better anchored. The SARB’s December 2021 Quarterly Bulletin points out that “in an environment of subdued domestic demand, core inflation remained relatively well-contained ... despite accelerating from April 2021”.

Misdiagnosing the type of domestic inflation prevailing in SA and using much higher interest rates to deal with it could raise the spectre of “stagflation” (low growth combined with high inflation). If this happens, it will give SA the worst of both worlds. Higher borrowing costs may not curb cost inflation and instead depress output and employment.

Against this constantly changing global and domestic backdrop, the economic and political forces dominating the SA landscape this year have converged into one overriding priority for the country in the immediate future – to strengthen service delivery in its broadest sense, at multiple levels.

SA has a clear and urgent choice to make – either promote real growth, hasten transformation, and keep government affordable and the tax burden reasonable, or tolerate persistent delivery failures, which will lead to rising costs, a further decline in service quality and greater financing demands.

A major driver of the investment needed to induce higher levels of growth and job creation is policy certainty. Reducing uncertainty requires the creation of a credible macroeconomic environment that provides a stable outlook for investors, consumers and workers.

Former Finance Minister Tito Mboweni recently reiterated that policy certainty is one of the fundamental structural reforms needed in SA as it will have a marked impact on investors’ decisions.

It is, therefore, wrong to simply accept, and implicitly condemn, the anticipated low growth rates for SA. SA must vigorously test the limits of its economic potential by implementing obvious and pressing economic reforms. But this will not happen automatically. The economy is not on cruise control.

If we want to see tailwinds prevail over headwinds in SA in 2022, then the promised economic reforms must be tackled with a new sense of urgency. Procrastination and drift are the enemies of delivery and momentum.

Raymond Parsons is a professor at the NWU School of Business & Governance and a special policy advisor to Business Unity South Africa. This is an edited version of his original article, which appeared on IOL and can be accessed here.