The targets South Africa says it needs to meet to put the economy on track to create more jobs may prove elusive, at least in the medium term.
Economists and Finance Minister Pravin Gordhan share the view that many bottlenecks must first be overcome.
In one of his public engagements following his Budget speech last week, Gordhan said achieving higher single-digit gross domestic product (GDP) growth – such as the 8 percent envisaged in a working paper compiled for the Reserve Bank – was “not a question of switching on something” and then it happened.
GDP growth targets have been varied. The National Development Plan says the economy needs to grow by at least 5.4 percent a year to dent unemployment, which official figures put at about 25 percent and some say could be as high as 40 percent.
In July last year, growth of 8 percent was thrown into the mix in the working paper prepared for the Reserve Bank, although it was not the bank’s official policy stance.
But growth has been tepid in recent years, partly because of a myriad inhibitors, especially poor education, red tape, reluctance by big business to invest, regulatory uncertainty and concerns – either real or perceived – that labour laws are too rigid.
In the past three years, growth has averaged 2 percent to 3 percent. Jumping from that to a much more robust trajectory seems rather too ambitious, according to economists.
In his Budget, Gordhan slashed his growth forecast for this year to 2.7 percent, from 3.5 percent. The economy grew by 1.9 percent last year, down from 2.5 percent in 2012 and 3.6 percent in 2011.
The current growth rates “are clearly insufficient to remove all the socio-economic shortcomings… There is consensus that we need a higher growth rate… However, it is very clear that the type of growth that we require would seem ambitious and has been elusive for some years now,” Standard Bank chief economist Goolam Ballim said.
David Faulkner, Christopher Loewald and Konstantin Makrelov said in their working paper that with South Africa’s current growth trajectory, it was “highly unlikely” it could achieve the 8 percent targets set out in the paper.
The country has also been hit by power supply uncertainty, following years of underinvestment in Eskom’s power generation capacity by the state. The country now awaits completion of two long-delayed coal-fired power plants, Medupi and Kusile, to alleviate the power crunch.
Ballim said the absence of power to feed investment commitments was one of the critical constraints that prevented South Africa from achieving the growth it sought.
“Until new electricity base-load capacity is brought on stream… we cannot increase the economy’s productive capacity. The economy’s natural growth rate has probably dropped to below 3 percent and will remain so until electricity supply elevates sustainably.”
Gordhan said reaching higher growth rates would require serious interventions, over and beyond just dealing with current constraints.
“Let’s talk about what are the things that we need to do,” Gordhan said at a Budget Review breakfast organised by the Association of Black Securities and Investment Professionals and AHI in Cape Town on Thursday. “[The National Development Plan says] remove energy constraints, get better skilled workforce, create the right climate for investments… If you do all of those things, plus have other initiatives coming in [as] economic actors, then you can begin to see these numbers…”
Ballim said initiatives to look at included strengthening South Africa’s trading and investment partnerships with the rest of Africa. Expansion of private investment commitments was also necessary.
But he said given global conditions and especially China’s slowdown, and deterioration in household finances, it would be difficult over the medium term for the country to reverse its weak performance.
The spectre of rising interest rates also complicates the outlook. In its analysis of last week’s economic figures, Econometrix said “the impact of higher interest rates will feed through into depressing growth in 2015 and 2016 by more than current consensus”.