JOHANNESBURG - South Africa’s economic growth is projected to continue to be weak this year, before picking up moderately next year, as private consumption and exports rise on the back of a recovery in commodity prices and growth in export markets.
This is according to a report from the Organisation for Economic Co-operation and Development (OECD), which said unemployment and inequality would remain high, reflecting large skill gaps and low education quality. Released yesterday, the report said though inflation had been above target - due to the rand depreciation and rising food prices - continued depreciation of the rand due to ratings downgrades could have second-round impacts on inflation.
It said monetary policy was operating in a difficult environment of high inflation and low growth. The long-lasting drought, rising oil prices and the delayed exchange rate pass through maintained inflation high last year and any further rand depreciation might keep inflation high.
The OECD said fiscal consolidation had to continue to limit the growth of debt. The main risks to debt sustainability stem from the consequences of the ratings downgrade and rising contingent liabilities in state-owned enterprises.
“The downgrade may trigger spikes in interest rates with persistent effects on growth and debt.”
Unemployment
The report stated that investment would remain low this year and persistently high unemployment and a high level of indebtedness would keep household consumption low. However, on the government side, expenditure growth would remain moderate as rising debt was still calling for consolidation.
It said exports would support demand, as commodity prices were picking up and growth was firming in South Africa’s main foreign markets. The OECD said bold structural reforms were needed to boost growth.
“Greater regional integration can boost growth by broadening access to markets and resources. South African firms can benefit from deeper integration, given their better financial resources and advanced technologies, if trade and non-trade barriers are further removed.”
Another moderate increase in gross domestic product was projected this year as investment would remain subdued and household consumption growth stayed moderate. A growth pick-up next year would come mainly from exports supported by higher commodity prices.
The rand also remains highly responsive to US interest rates, and hence exposed to their increases. In addition, as the UK is South Africa’s largest European trading partner, uncertainty about the impact of Brexit may affect imports and financial flows.
The OECD said the outlook could be better if international commodity prices kept on increasing or growth accelerated in the main trading partners, such as the US and China. Also, the agriculture sector was growing again and could through price effects boost domestic demand.
The current crop estimates were large and the harvest seemed to be good. If food prices came down significantly, it would ease the pressure on households and increase their purchasing power.
OECD secretary-general Angel Gurría said the country’s economy had registered tremendous progress over the past two decades, boosting living standards and lifting millions out of poverty nationwide.
“South Africa has accomplished many great things in the past two decades, but building stronger and more inclusive growth will require bold action from policymakers,” said Gurría.
“Ensuring a better future for all South Africans will require increased access to higher education, a stronger and fairer labour market, deeper participation in regional markets and a regulatory framework that fosters entrepreneurship.”
The report said globalisation and financial openness helped deepen financial markets, but also implied high volatility of the rand and the stock market. Workers in exporting sectors benefited from globalisation with high wages, tending to raise inequality.