The biggest risks to South Africa right now: economists

South Africa’s GDP results for Q1 2021 are positive, with the outlook for the rest of the year also relatively encouraging, says economists at Nedbank.

However, a number of local issues threaten to derail the country’s good start to the year, the bank said in a research note on Tuesday (8 June). These include:

  • A lack of reliable and cost-effective electricity supply;
  • Frequent power outages (load shedding);
  • High unemployment;
  • Slow Covid vaccine rollout;
  • Slow implementation of structural reforms.

“From the production side, growth will be driven mainly by mining and manufacturing, buoyed by increased global demand and elevated commodity prices.”

“However, domestic structural issues will continue to undermine the upside. The most damaging constraint remains the lack of reliable and cost-effective electricity.

“Domestic demand will also improve off an extremely low base. Low-interest rates and firmer household finances should drive growth in consumer spending, which will underpin recoveries in domestic trade, finance, real estate and business services.

It will also offer some relief to tourism but is unlikely to fully compensate for the absence of international business and leisure tourists.

“Despite these anticipated improvements, consumer confidence will remain fragile, depressed by high unemployment and the slow vaccine rollout,” Nedbank said. “Little is expected from the government in 2021, given its stretched finances.”

Nedbank added that fixed investment will be slow to recover, hurt by ample spare capacity, frequent power outages and the slow implementation of structural reforms.

“The government recently opened the fifth bid window for renewable energy projects. Progress on this front could lift business confidence and stimulate investment spending over the medium term.

“Although the outlook still depends on the virus’s progression, the economy looks likely to post growth closer to 4.9% in calendar 2021, up from our earlier estimate of 4.4%.”

Flatlined

“These numbers may be promising but one must consider that the South African economy had somewhat flat-lined three years prior to Covid-19 – and the population continued to grow,” said Maarten Ackerman, chief economist at Citadel.

Ackerman said that South Africa experienced a significant drop in Q2 2020 due to the economic ramifications of lockdown and is now recovering at a steady rate.

“If this continues, South Africa may reach pre-Covid levels by the end of the year – but this is not enough considering how stagnant the economy was prior to then. South Africa needs to grow at a rate of over 2.5% to thrive,” he said.

Data from Statistics South Africa shows that the Covid-19 pandemic and subsequent lockdown restrictions caused significant disruptions to the South African economy.

Real GDP was R782 billion in the first quarter of 2020. In the second quarter of 2020, when lockdown restrictions were at their most stringent, economic output slumped to R652 billion.

Economic activity has increased since then, in line with easing lockdown restrictions, with real GDP rising to R761 billion in the first quarter of 2021.

This level is roughly comparable to what the economy was producing in the first quarter of 2016, and is 2.7% down from the R782 billion recorded in the first quarter of 2020.


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The biggest risks to South Africa right now: economists