Why South Africa is like an old car engine right now: Absa

South Africa currently faces more downside risks than upside risks, despite recent reform measures announced by the ruling ANC and a better than expected post-pandemic rebound, say economists at Absa.

The country’s downside shocks are also more likely to have multiple knock-on effects that can snowball quickly, whereas upward shocks probably just provide a bit more juice for upward incremental improvement elsewhere in the economy, the bank said in a research note.

“We have previously likened economies to a car engine in some respects, where one small thing can break down, causing the whole engine to seize up, but one positive shock is not suddenly going to make the whole engine or economy operate by an order of magnitude better.

“In South Africa’s case, for example, the positive terms-of-trade shock has certainly given policymakers more fiscal space to fine-tune the rest of the economy, but it has not yet fixed our unemployment crisis.

“If the terms-of-trade shock had been negative, instead of positive, South Africa would likely have tumbled into a full-fledged fiscal crisis, with a further sharp erosion of investor confidence, big job losses, etc.”

The group added that South Africa’s rebound from the pandemic has been stronger than expected. In part, this reflects some long-standing strengths, such as mostly sound institutions and deep financial markets, it said.

“It also reflects, in our view, an inherent economic resilience. However, despite these strengths, and some recent progress on both the economic reform and political fronts, we remain concerned about South Africa’s key vulnerability, specifically the terrible trifecta of rising unemployment, extreme income inequality and grinding poverty, particularly given that the commodity price shock resulting from the Russia-Ukraine war is likely to weigh most heavily on low-income households.

“As long as growth remains subdued, and unemployment continues to rise, there is a risk of another outburst of violent social unrest, which we believe would be hard to contain. For now, however, we believe that things are moving in the right direction, but the road ahead to a better future will remain long and challenging.”

Read: Bank warns over state of South Africa’s economy

Must Read

Partner Content

Show comments

Trending Now

Follow Us

Why South Africa is like an old car engine right now: Absa