PwC has revised South Africa's economic growth prospects for 2022 on the back of domestic and international upheaval, which has been exacerbated by the current energy crisis and the war in Ukraine.
At the start of 2022, PwC’s downside economic scenario suggested real gross domestic product (GDP) growth of 1.6 percent this year and an average inflation rate of 5.6 percent.
PwC yesterday said that its current baseline outlook was for 1.8 percent growth and 6.3 percent inflation, which is not far removed from this downside view from January.
PwC chief economist Lullu Krugel said there were still many industries lagging behind in spite of the first quarter GDP growth returning the economy to its pre-pandemic size.
Krugel said their baseline scenario for the country had deteriorated since the start of 2022 as a combination of local and international factors caused a weaker rand, higher consumer price inflation, a faster increase in interest rates, slower economic growth, and a continued rise in the unemployment rate.
PwC’s economic outlook comes when Eskom has plunged the country into Stage 6 load shedding for the first time since December 2019 due to weakening generation capacity and industrial action by plant maintenance workers.
Krugel said electricity load shedding was the primary constraint on South Africa’s economic growth process, leaving the country’s medium- to long-term potential annual growth at around 1.5 percent.
Eskom shed 1 054 gigawatt hours (GWh) during January-April 2022, starting the year off with a 25 percent increase in average load shedding intensity per month.
“The current outlook for the economy is not far removed from what a downside scenario looked like at the start of the year,” Krugel said.
“Companies that worked with different forecast scenarios before the onset of the disruption caused by the Russian invasion of Ukraine, and who planned for this kind of downside situation, would have strategies in place halfway through 2022 to manage the deteriorated macroeconomic outlook.”
PwC has often emphasised that the South African economy needed structural reforms to place it on a higher GDP growth trajectory.
The report said that despite progress on some structural reforms, the electricity supply situation had shown no improvement.
It said the two goals facing critical challenges to implementation are linked to improving the electricity situation: improving the Energy Availability Factor (EAF) to over 70 percent and implementing the emergency procurement of 2 000MW of generating capacity.
The report also highlights how geopolitics in eastern Europe would disrupt global commodity markets with greater intensity over a longer period of time, impacting the oil price and affecting the rand.
This will, in turn, push the food and fuel inflation higher, prompting the South African Reserve Bank (SARB) to adopt a hawkish monetary policy stance by raising interest rates.
PwC South Africa senior economist Christie Viljoen said the SA Reserve Bank could increase the repo rate by another 100 basis points during the remainder of 2022 after a 125 basis points hike since November 2021.
“Our updated forecasts are more pessimistic about the economic outlook towards 2023 due to several headwinds, including pressure from geopolitical risk on the exchange rate, the near-term expiry of fuel tax breaks, and no improvement in the electricity load-shedding situation, amongst other challenges,” Viljoen said.