1.13 GDP Growth in South Africa by Sector

South Africa’s growth is expected to slow due to contractions in agriculture and the industrial sector. Growth of South Africa’s economy slowed to 0.2 percent year-on-year in the second quarter of 2022, from 2.7 percent in the previous quarter. The worst power outages on record and flooding in Kwazulu-Natal province were key factors that held back economic performance in the second quarter. On the demand side, the growth slowdown was mainly due to a decline in net exports and weaker consumption. Private investment increased at a slower rate. Private consumption growth was impacted by FIGURE 1.13: GDP Growth in South Africa by Sector (%) the acceleration in food 50 and fuel prices. The supply 40 side of the economy was 30 supported by the service 20 sector, while the agriculture 10 and industrial sectors 0 contracted (figure 1.13). Despite the favorable terms of trade from the rally in commodity prices, the country faced rising food and fuel prices, causing a big leap in inflation, which breached the ceiling of the central bank’s target range (6 percent) in May for the first time since March 2017. Inflation reached a 13-year high of 7.8 percent in July 2022 before easing slightly to 7.6 percent in August, despite the central bank’s consecutive rate hikes since 2021. The monetary policy authority surprised the market with a rate increase of 75 basis points in the July meeting, taking cumulative hikes to 200 basis points since the beginning of the tightening cycle in November 2021. The economy is projected to grow by 1.9 percent this year, a downward revision of 0.2 percentage point relative to early projections in April. The Angolan economy is one of the major beneficiaries of favorable terms of trade, which translate into real growth of 3.1 percent in 2022, from 0.8 percent in the previous year. The 0.2 percentage-point upgrade in growth relative to the April projections reflects the contribution of a higher-than-expected rally in oil prices, averaging about $100 per barrel in 2022. On the demand side, the performance of the economy is on the back of rising private consumption, government expenditure, and current account surplus. The government has started reaping the benefits from its efforts to improve revenue mobilization by increasing the efficiency of tax collection and reducing tax evasion. As a result, the fiscal balance recorded a surplus of 1 percent of GDP. Loose monetary and fiscal policies, in response to declining inflationary pressures, have shored up consumption expenditure. The central bank kept the policy rate unchanged in six consecutive meetings. Inflation plunged from 27.7 percent in January to 19.8 percent in August—the lowest level since March 2020—on the back of a strong kwanza. High oil prices coupled with partial recovery in production boosted external revenues, which exceeded the

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Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2020 2021 2022 Agriculture Industry Services Source: Statistics South Africa. Note: GDP = gross domestic product.

downward pressure exerted by rising import bills. The current account registered a record high surplus of 15.2 percent. In addition to the strong performance of the oil sector, the agriculture and service sectors grew, yet by less than their performance in 2021.

Excluding the three largest economies in the region, variation in performance across countries emerged from the impact of the terms of trade shock arising from the surge in commodity prices. Economic growth for the region excluding Angola, Nigeria, and South Africa is projected to slow to 3.8 percent in 2022, from 4.4 percent in 2021, but higher than the regional growth of 3.3 percent. The growth rate is revised down from the forecast of 4.1 percent in the April 2022 Africa’s Pulse, mostly owing to the impact of commodity prices, which varies across countries. Similar to most EMDEs, fluctuations in commodity prices explain more than 50 percent of the variation in business cycles in Sub-Saharan African countries.10 Commodity price movements trigger inflationary pressures in low-income countries where a large share of income is spent on food and fuel. They are also associated with exchange rate volatility, which exacerbates price effects and poses challenges to policy makers (Drechsel, McLeay, and Tenreyro 2019). For commodity exporting countries with more liquid financial markets, rising commodity prices can trigger large capital inflows, which in turn can lead to a banking or sovereign default crisis if they are not invested wisely (Eberhardt and Presbitero 2021; Reinhart, Reinhart, and Trebesch 2016).

Resource-Rich Countries The impact of high commodity prices on resource-rich countries depends highly on the net effects on trade. The countries where the increase in external revenues surpasses rising import bills will see an expansion of their economies, whereas the opposite is true in countries with widening current account and fiscal deficits. Specifically, oil exporting countries are experiencing rising external and fiscal revenues, which has led to current account and fiscal surpluses or declining deficits. This in turn supported economic activity in 2022, which is projected to grow at 3.1 percent, up from 2.7 percent in 2021. Chad and the Republic of Congo are set to emerge from two- and seven-year recessions in 2022 and are expected to grow by 3.1 and 1.9 percent, respectively. This good performance reflects a combination of soaring oil prices, the stable oil production, and strong performance of the non-oil sector. Small current account and fiscal surpluses are expected in Chad, while the surpluses registered last year widen in the Republic of Congo. Similarly, the economic expansion in Equatorial Guinea in 2022 (3.2 percent) is expected to benefit from higher oil prices, although subsidies to mitigate against rising food prices will weigh on public finances and narrow the budget surplus.

Mineral and metal resource-rich countries are forecast to grow at 4.5 percent, down from 5.1 percent in 2021. The growth projected in April is revised down by 0.2 percentage point as the external receipts from high metal prices proved insufficient to make up for rising import bills. After exhibiting double-digit growth in 2021 (12.1 percent) following a severe contraction a year earlier (-8.5 percent), the economic growth rate in Botswana is set to moderate in 2022 (3.2 percent). Growth is supported by increased diamond and copper production alongside high metal prices, the relaxation of restrictive measures on the tourism industry, and favorable weather conditions for the agriculture sector. However, fiscal measures that have been adopted

10 See Mendoza (1995), Kose (2002), and Aguiar and Gopinath (2007). Di Pace, Juvenal, and Petrella (2020), and Kabundi et al. (2022) provide more detailed analysis of the impact of commodity prices on the business cycles of EMDEs.

to combat inflation weighed on public finance and hold back growth. Economic slowdown in South Africa translated into low revenue receipts from the Southern African Customs Union.

The Namibian economy struggled to pick up speed, up from 2.7 percent (2021) to 2.8 percent (2022). The growth is on account of good performance of the mining sector, particularly, rising output of diamonds, copper, and uranium. However, contractionary monetary policy to maintain parity with the South African rand and to fight rising inflation may drag down growth. The twin deficits recorded last year will persist in 2022. After emerging from the recession in 2020, growth in Zambia is projected to moderate this year at 3.3 percent. The strong momentum in services supports economic activity, while challenges in mining and agriculture hold back growth. The current account continued to record a surplus, while the budget deficit narrowed as the government consolidated in line with the expected debt-restructuring program. Likewise, economic activity is expected to expand in the Democratic Republic of Congo (6.1 percent), Guinea (4.6 percent), Liberia (3.7 percent), and Sierra Leone (3.7 percent). Hence, growth in resource-rich countries is expected to edge down (2.9 percent) in 2022.

Non-Resource-Rich Countries Non-resource-rich countries are disproportionately affected by the Russia-Ukraine conflict owing to the deterioration in terms of trade as import bills rise. Output is expected to plunge by 0.8 percentage points to 3.9 percent in 2022. The inflation outlook has deteriorated in many countries; current account deficits have widened, putting more pressure on the domestic currencies; and policy makers have reacted aggressively with contractionary monetary policy, which weighs on economic activity. For example, the average growth forecast among West African Economic and Monetary Union (WAEMU) countries is expected at 4.9 percent, down from 5.9 percent in 2021, and 0.2 percentage point lower than the April 2022 Africa’s Pulse forecast.

GDP growth is set to decline by more than 1.2 percentage points in Benin (5.7 percent), Burkina Faso (4.3 percent), Côte d’Ivoire (5.7 percent), Guinea-Bissau (3.5 percent), Mali (1.8 percent), and Senegal (4.8 percent), while a mild slowdown—less than 0.5 percentage point—will be observed in Togo (4.8 percent). By contrast, growth in Niger is expected to jump by 3.6 percentage points to 5.0 percent on the back of expansion of the agriculture sector after a severe drought that dragged down growth in 2021. Investment in several infrastructure projects, particularly the construction of the oil pipeline and the Kandadji Dam, boosted growth on the demand side. The subregion is characterized by a twin deficit attributed to government interventions to contain inflation that has breached the regional target of 3 percent. Since the activation of the escape clause allowing WAEMU countries to increase the government deficit above the convergence target of 3 percent, the consolidation process has been delayed to 2027.

Outside the WAEMU, growth in Ghana is expected to slow in 2022 to 3.5 percent, far below the country’s average pre-pandemic performance (7.0 percent). The economy has been struggling with various setbacks, including rising public debt (104.6 percent of GDP), elevated inflation (33.9 percent in August), and a depreciating currency. To curb elevated inflation, the central bank raised the policy rates at three consecutive meetings to a record high. Real GDP growth dropped sharply by 2.8 and 2 percentage points in Ethiopia and Kenya, respectively. In