Good news for South Africa’s economy: Old Mutual

South Africa has seen significant improvements recently that could boost economic growth expectations beyond the more conservative forecasts in recent months, says Johann Els, the chief economist at Old Mutual Investment Group.

Els said that apart from the shift to a democratic society, the recent energy reform announced by President Cyril Ramaphosa is the most significant structural reform seen in South Africa to date.

He added that policy reform – such as that seen around the energy sector – could be the turning point to lift confidence in the country.

“To lift growth towards 4% to 5% on a sustained basis, we need to see massive privatisation. Outright privatisation, as such, might never happen, but the increased role of the private sector in traditional government/ state-owned entity functions – which we’re starting to move towards with this emergency energy plan – could be seen as privatisation by stealth,” he said.

“However, we still need to see more crucial reforms such significant labour market deregulation, education system reform and a stronger social compact between the government, labour and business.”

South Africa’s growth path is changing from a downtrend to an uptrend, said Els. Old Mutual expects to head towards 2.5% annual average GDP growth over the medium term – a noteworthy shift from the 1% per annum over the five years to 2019.

Els said he is optimistic about the global risks posed by worldwide financial instability. He said that the country’s inflation problem is less severe than what is happening globally, it is in a strong position due to supportive commodity prices, and the global outlook is likely to change.

“I don’t see SA being severely impacted by the global downturn as I believe we’re in a position to better withstand the pressure than in the past.”

The South African economy should recover in the second half of this year, according to Els. “Manufacturing PMI (Purchasing Managers’ Index) was hard hit by load shedding, and the whole economy PMI is still in expansionary territory, but the leading indicator is easing.”

Inflation is now likely going to stay above 7% until September or October, moving down to around 6% by December and 4.5% by the end of 2023, said Els.

“Services inflation is still low, while consumer goods inflation rates have been under upward pressure recently, but should peak soon.”

Consumers are likely to experience fewer price pressures in the future as businesses won’t be able to pass on the price increases they did previously when consumers are more willing to accept increases, he added.

Els said that confidence in the country is set to improve, and economic growth needs more substantial confidence to get on a better footing.

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