South Africa’s cost-of-living crisis has worsened over the past 10 years


South Africa’s economy shrunk below the size of what it was prior to the Covid-19 pandemic struck in the second quarter, hit by damaging floods and severe power outages.

The economy contracted 0.7% in real terms during the second quarter of 2022, which was slightly worse than economists had predicted but slightly better than the South African Reserve Bank had predicted in the most recent statement of the Monetary Policy Committee, noted Reza Hendrickse, portfolio manager at PPS Investments.

“First quarter growth was also revised lower, from 1.9% to 1.7%, given downward revisions in both Agriculture and Mining. Year on year, economic growth was barely positive as a result, with the economy having limped along by just 0.2% in real terms.

The median of 13 economists’ estimates in a Bloomberg survey was for a slump of 0.8%. The economy grew 0.2% from a year earlier, compared with a forecast of 0.6% growth in a separate survey. A Reuters market consensus also expected 0.8%.

Some of the key issues impacting growth this year include the impact of continued severe load shedding, as well as the devastating floods in KZN, said Hendrickse. “Globally, factors such as the effects of the war in Ukraine and its impact on energy prices have also driven inflation higher, prompting aggressive, demand-dampening rate hikes from the SARB.”

The country’s economy remains stuck in its longest downward phase since World War II and hasn’t grown by more than 3% annually since 2012, noted Bloomberg.

“Slow policy reforms, weak business sentiment and high levels of crime continue to weigh on fixed investment spending, with private companies wary of committing large sums of money to domestic projects. Gross fixed capital formation rose 0.5% from the previous quarter, it said.

Household spending, which accounts for about two-thirds of GDP, grew 0.6% in the second quarter. “Household consumption expenditure is likely to come under further pressure as consumers reel from high fuel and food prices and an aggressive interest-rate hiking cycle. Consumer sentiment about future prospects is at its worst since the mid-1980s, Bloomberg said.

“South Africa’s cost-of-living crisis has worsened over the past decade,” said Sanisha Packirisamy, economist at Momentum Investments. “Real growth in the economy averaged a mere 1.1% in the last decade in comparison to the average rate of growth in the SA population of 1.5% for the same period.”

And, the outlook for growth has deteriorated during recent quarters and remains clouded, said Hendrickse. Both the IMF and the SARB expect the South African economy to grow around 2% in 2022. “There is, however, some risk to these forecasts, particularly if the global economy continues to lose momentum and recession risks rise.”

Europe, said Hendrickse, is potentially already in a recession, while there are signs that the US might also experience a recession at some point during the next few quarters. “For now, and while inflation remains stubbornly high, Central Banks are compelled to maintain their tighter monetary policy stance, which is a constraint for growth.”

“In our view, slowing global demand and an unwinding of accommodative monetary policy, fiscal consolidation, structurally high unemployment and energy supply shortages, locally, continue to raise notable downside risks to the outlook for local growth,” said Packirisamy.

“We expect growth to average 2% in 2022 before slowing to 1.7% in 2023. This year’s growth forecast is in line with the August 2022 Reuters Econometer poll, but our expectations are firmer than their 1.5% prediction for 2023. Our projection for 2022 is in line with that of the SA Reserve Bank’s, although they paint an even gloomier picture for growth of 1.3% for 2023.”

FNB senior economist, Thanda Sithole, said that the latest data does not alter the bank’s current-year growth forecast of 1.8%.

“We expect some of the headwinds that affected economic activity in 2Q22 to have been sustained into 2H22. Rising interest rates and higher living costs are likely to have a dampening impact on domestic spending resilience. However, employment gains and continued moderate growth in the compensation of employees could underpin economic activity in 2H22.”

FNB said it expects growth to average 1.8% over the medium term, supported by energy reform-related infrastructure investment and investment spending in other network industries such as roads and rail as well as ports and water.

“The slowing growth from South Africa’s major trading partners poses a risk to our forecast. However, domestic economic growth could remain supported if reforms to address the energy crisis and other network industries’ infrastructure inefficiencies are executed timeously,” Sithole said.


Read: 4 ways the petrol price drop is good for property in South Africa

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Publish date : 2022-09-06 14:05:42

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