By Raymond Parsons
This economic review surveys the economic and socio-political factors that have shaped the global economy in general and the SA economy in particular in 2021, thus setting the tone for 2022. At the global level – notwithstanding significant concerns surrounding the new Omicron variant – the challenge now is how to deal with lower growth and higher inflation as many countries grapple with recent economic crosscurrents and costly supply-chain disruptions.
Interest rates and monetary policy shifts, therefore, need to be handled in a sensible manner so as not to precipitate ‘stagflation’. What the first quarter of 2022 has in store for the world – medically, economically and politically – is still highly uncertain. As a small, open economy, SA is vulnerable to volatility both at a global level and closer to home.
Domestically, the new year represents another inflection point for the SA economy. After a likely 5% rebound in GDP growth in 2021, the growth forecasts for 2022 and beyond are conservative – and too low given SA’s immense socio-economic challenges and need for more robust, inclusive growth, powered by much higher levels of public and private investment.
The dominant challenge is how to remedy service delivery failures at multiple levels of government with a view to boosting confidence and transforming the economy in sustainable ways. However, it is possible to ensure that ‘tailwinds’ prevail over ‘headwinds’ in 2022. This economic review concludes with 10 policy-related building blocks designed to put SA on a stronger footing and create a more efficient and inclusive economy.
The global economic outlook and SA
As was the case in 2020, most South Africans are (understandably) keen to see the back of 2021. It has been another tough year for the country. President Cyril Ramaphosa himself has referred to it as a ‘catastrophic’ time for the SA economy in general and business in particular. Low points include the widespread civil unrest in July, extended periods of Eskom load shedding, intermittent Covid-related lockdowns, the announcement of record-high unemployment figures, the emergence of Omicron and the imposition of various international travel bans on SA.
Negative factors weighed more heavily on SA’s economic perceptions than positive ones, even though overall 2021 is likely to register a strong ‘rebound’ in its GDP growth rate – i.e. about 5%, up from the -6.4% contraction experienced in 2020. The momentum behind the economic rebound in SA is, however, now largely behind us.
As 2021 draws to a close, it is again time ‘to look into the crystal ball’ both externally and internally and ask: what is the economic lie of the land and what should be done about it? As SA is a small, open economy, it also requires analysts to appraise the latest, most pertinent global trends and developments.
These are significant for SA, not only because they help to inform short-term domestic policy responses, but also because they provide the broad contours of the country’s longer-term global competitiveness strategies.
So, what is the global economic picture telling us? Earlier predictions of strong global growth in 2021 have already been systematically trimmed in various quarters. Although there are still many uncertainties surrounding Omicron, the rapid spread of new infections across the world is a grim reality, bringing with it additional economic risks and disruptions.
In a world that has grown weary of Covid-related restrictions, new lockdown measures are nevertheless being introduced in various countries. Two of the most obvious economic risks in 2022 are now lower global growth and higher inflation (off an already-high base) – with the possibility of ‘stagflation’ emerging.
Apart from Omicron and its accompanying challenges, two additional reasons for emerging markets like SA to feel vulnerable are the gradual tightening of US monetary policy and a sharp slowdown in the Chinese economy. The global commodity boom seems to be over for now (except for some key SA agricultural exports to China, whose prices would suggest otherwise).
While the US’s gradual ‘unwinding’ of its quantitative easing monetary policy may, for various reasons, be less of a shock to emerging economies now than it was in 2013, most of these economies could still be left with unenviable choices. A hawkish US monetary policy and a strong dollar usually go hand in hand with a declining global risk appetite.
How emerging economies are impacted and how they respond will, of course, also depend on their domestic economic circumstances and resilience. Those economies that have China as a major export market need to grasp the new reality that, even as the Chinese government proceeds to stimulate its economy, the country’s economic growth rate has fallen to about 5%. This is the lowest in roughly 30 years. It raises questions about whether, after several decades of remarkably high, ‘catch-up’ growth as a developing country, China is now facing a more modest growth phase in its economic evolution and structural rebalancing.
To provide an additional perspective, The Economist (4/12/2021) gathered data relating to key macroeconomic variables for 40 large emerging economies within the context of tighter US monetary policy and slower growth in China. It combined factors such as large current account deficits, high levels of debt (especially foreign debt), chronic inflation and inadequate forex into what it called a ‘vulnerability index’ for certain emerging economies. In the index, higher scores reflect greater economic fragility.
Argentina tops the list, followed by Sri Lanka, Egypt, Brazil and Turkey. SA ranks midway on the list, in 19th place. The Economist nevertheless expects a ‘rocky ride’ for most of these emerging economies next year, especially in terms of their currencies. Will the bell toll again for a volatile rand in 2022?
The centrality of inflation in current global economic policy debates
Recent developments have undoubtedly given greater prominence to global inflation trends and the interest rate outlook. In recent months, more central banks have pivoted towards tightening as a way of combating inflation. Interest rates have been raised in several countries. The centrality of inflation and how it can best be handled by policymakers are now important elements in international economic policy debates. Yet so far, the inflation threat has elicited divided policy responses.
A recent IMF report (3/12/2021) emphasises that such responses must be calibrated to the unique circumstances of individual economies. Why is this so?
Countries’ monetary policy decisions have understandably been influenced by (1) the difficulty of adopting an appropriate interest rate stance when the outlook is both uncertain and volatile; (2) the possibility that, because of the heightened economic impact of Omicron, consumer demand may yet drop sharply with some central banks having to reverse their recent decisions; and (3) the fact that central banks have had to tailor their responses to domestic economic circumstances.
As the world and SA move into the third year of the pandemic, it is not necessarily all gloom and doom. Adaptive behaviour on the part of people, firms and governments – as well as more vigorous vaccination drives – can help to alter the future trajectory of the contagion. There are also tentative signs that supply bottlenecks may be easing while manufacturing hubs like Taiwan and Vietnam are beginning to show quicker delivery times.
Even in the face of some predicted worst-case scenarios, the world economy is not expected to experience another massive contraction in GDP growth, as was witnessed at the height of the pandemic in 2020. Stock markets have thus far also taken the latest developments in their stride. Yet, threats to the global economic outlook remain. The downside risks of the new, highly transmissible Omicron variant have clearly increased, thus weakening the chances of economic recovery in several countries next year.
Moreover, the speed with which certain countries recently imposed travel and other restrictions is a sign of volatility ahead. In any event, the prevailing balance of risks suggests that central banks will need to assess monetary policy decisions carefully in the light of growth and inflation trends in their respective economies over the coming months. What the first quarter of 2022 will usher in – medically, economically and politically – remains shrouded in much uncertainty.
The SA economy in 2022
Although, as mentioned, real economic activity in SA in 2021 as a whole is likely to deliver a growth rate of about (or just under) 5%, there was nevertheless a setback in 3Q 2021 when GDP growth declined by a higher-than-expected -1.5%. This contraction, if seen together with the recently reported record unemployment figures over the same period, confirms the serious damage done to the economy by factors such as the large-scale civil unrest and persistent Eskom load shedding earlier in the year. The COVID-19 pandemic has, also over time, exacted its economic toll on businesses, especially SMEs.
In unpacking the various economic trends in SA, the flat performance of total fixed capital formation (i.e., private and public sector investment) remains of special concern as it is upon this that future growth now mainly rests. Together with the multi-faceted impact of Omicron, these mixed trends inevitably cast a shadow over growth forecasts for 2022.
Some key sectors of the economy, such as manufacturing, have been less resilient than others. Fortunately, the ongoing strong performance of the agricultural sector is a major bright spot on SA’s economic horizon.
Growth forecasts abound. Recent growth expectations for SA in 2022, for example, have ranged from a pessimistic 1.4% (IMF) to a more optimistic 2% (Fitch). Other 2022 growth forecasts by public and private institutions range from 1.6% to 1.9%. The official Medium-Term Budget Policy Statement (MTBPS) in November projected an average growth rate of 1.7% over the next three years.
The good news is that Fitch now believes that there is enough economic momentum for SA’s GDP to reach its pre-pandemic level during 2022, whereas the SARB previously expected that it could take up to two years for the country to regain its lost economic ground.
However, that is not the whole story. The bad news is Fitch’s assessment of SA’s potential growth in the longer term being only 1.1%, although the large, negative ‘output gap’ at present means that actual growth will exceed that level over the next couple of years. This disappointing prognosis from Fitch needs to be further interrogated.
But the reality is that most of these latest conservative growth prognostications are in any case barely above the population growth rate and are therefore inadequate for a developing economy like SA. Policies in 2022 must be geared towards doing better in the face of the socio-economic red flags raised by these growth forecasts.
On the inflation front, domestic costs have risen over the past few months. Both the CPI and PPI levels have become elevated, driven mainly by the recent surge in fuel and raw material costs and higher food and electricity tariffs. On the basis of a 3–2 majority vote at its November meeting, the SARB’s Monetary Policy Committee (MPC) raised interest rates by 25 basis points because of concerns about the upside risks to inflation. This came after a prolonged period of relatively low-interest rates.
The MPC also signalled the likelihood of a collective hike of 100 basis points by the end of 2022. Borrowing costs for businesses and consumers are, therefore, destined to rise next year. What kind of inflation is on the cards in 2022?
Robeco strategist Peter van der Welle offers a useful distinction between ‘good, bad and ugly inflation’, saying (correctly) that the nature of the inflation matters. ‘Good inflation,’ he says, is ‘the non-accelerating type that coincides with an economy that is operating in equilibrium’. ‘Bad inflation’ is what he currently sees reflected in global supply-chain bottlenecks. ‘Ugly inflation’ (which is what must worry central bankers the most) produces a wage–price spiral, he concludes (Daily Maverick, 14/12/2021).
This framework is relevant in the SA context. In its above-mentioned report, the IMF includes SA in the group of emerging economies whose inflationary expectations showed signs of being better anchored. The IMF also says that when it comes to the relationship between economic recovery and core inflation, stronger underlying inflationary pressures now exist where demand has increased fastest.
However, this is not the situation in SA at present. Indeed, the SARB’s December 2021 Quarterly Bulletin points out that ‘in an environment of subdued domestic demand, core inflation remained relatively well-contained ... despite accelerating from April 2021’.
There are, therefore, grounds for caution as SA looks ahead. Misdiagnosing the type of domestic inflation prevailing in SA and using much higher interest rates to deal with it could raise the spectre of ‘stagflation’ (low growth combined with high inflation). If this happens, it will give SA the worst of both worlds. Higher borrowing costs may not curb cost inflation and instead depress output and employment.
The present balance of risks in SA’s economic outlook in 2022 thus presents policymakers with macro-policy dilemmas, with new and challenging trade-offs. ‘Policy-makers,’ says the IMF, ‘should remain agile, data-dependent, and ready to adjust course as needed’.
The way ahead for SA in 2022 – ensuring that ‘tailwinds’ prevail over ‘headwinds’
Against this constantly changing global and domestic backdrop, the economic and political forces dominating the SA landscape this year have converged into one overriding priority for the country in the immediate future – to strengthen ‘service delivery’ in its broadest sense, at multiple levels.
This speaks to what SA needs to do to achieve positive socio-economic outcomes, especially in building and strengthening state capacity. Dysfunctional service delivery has also given businesses greater opportunity, power and responsibility to call for and find solutions to widespread delivery challenges.
SA has a clear and urgent choice to make – either promote real growth, hasten transformation, and keep government affordable and the tax burden reasonable, or tolerate persistent delivery failures, which will lead to rising costs, a further decline in service quality and greater financing demands.
Efficient service delivery is now a universal cross-cutting factor, which is needed to boost confidence and revive long-neglected economic growth drivers. Next year, we need to see SA embrace the notion of a delivery state, characterised by policy implementation, with the private sector playing a strong, collaborative role.
Importantly, SA needs to formulate and implement policies that lead as much to efficiency as they lead to justice. Why? Because it is becoming increasingly evident in SA that achieving ‘value for money’ in the delivery of public services at all levels of government is not a question of being efficient at the expense of being just - it is just. Not delivering to the required standard (or at all) is ‘unjust’ in the eyes of many deprived citizens.
Therefore, the persistent gap between policy formulation and policy implementation, particularly in the energy sphere, needs to be narrowed and implementation risks generally reduced. In other words, there must be evidence next year of an implementation-led economic recovery that steadily dismantles the structural obstacles to inclusive growth and job creation, thereby progressively raising SA’s growth ceiling.
A major driver of the investment needed to induce higher levels of growth and job creation is, of course, policy certainty. Reducing uncertainty requires the creation of a credible macroeconomic environment that provides a stable outlook for investors, consumers and workers.
Former Finance Minister Tito Mboweni recently reiterated that policy certainty is one of the fundamental structural reforms needed in SA as it will have a marked impact on investors’ decisions. (The NWU Policy Uncertainty Index for 4Q 2021, due out next month, will calibrate the current policy uncertainty climate in SA as the economy enters 2022.)
It is ,therefore, wrong to simply accept, and implicitly condemn, the anticipated low growth rates for SA, as outlined earlier in this economic review. SA must vigorously test the limits of its economic potential by implementing obvious and pressing economic reforms. But this will not happen automatically. The economy is not on cruise control.
SA’s economic performance next year will largely depend on how well the government and its social partners manage the challenges and exploit the new opportunities, using the policy tools at their disposal. Hence, if we want to see the ‘tailwinds’ prevail over the ‘headwinds’ in SA in 2022, then the promised economic reforms must be tackled with a new sense of urgency. Procrastination and drift are the enemies of delivery and momentum.
Getting off to a good (policy) start in 2022
There are already several readily available elements and ‘work-in-progress’ commitments that SA can mobilise and expedite to enhance its economic performance and outlook in 2022. In this regard, the following 10 building blocks could take the economy to a new level:
1. Keep up the momentum with the vaccination programme and manage Omicron in ways that create an optimal balance between lives and livelihoods in 2022 while recognising that a healthy society and a healthy economy go hand in hand.
2. Put SA on the path towards eventual positive investment status by capitalising on Fitch recently changing its outlook on the SA economy from negative to stable, based on the rating agency’s conditional reading of the country’s improved growth and fiscal metrics.
3. Support and act on the policy commitments made in 2021 to stabilise Eskom and expand the role of independent power producers, thus acknowledging that a precarious energy supply remains the Achilles heel of the SA economy.
4. Accept and promptly implement the key recommendations emanating from the much-anticipated report from the Zondo Commission into State Capture, thereby creating the foundation for better governance and the eradication of endemic corruption in SA.
5. Prioritise the rebuilding of the seriously neglected public transport system both to improve logistical efficiency and to offset the negative impact of high fuel prices on low-income households.
6. Act on Finance Minister Enoch Godongwana’s expressed commitment to critically investigate the current fuel price structure as a pervasive source of cost inflation in the economy.
7. Support the National Treasury’s recent initiative to expand and strengthen the role of public-private partnerships with a view to accelerating crucial infrastructure development next year.
8. Implement the reforms needed to overhaul service delivery at the local government level while also strengthening accountability and financial sustainability.
9. Speed up negotiations for the African Continental Free Trade Area (AfCFTA) agreement to expand and deepen intra-African trade and encourage greater economic and export diversification.
10. Use key platforms (such as the State-of-the-Nation address in early February, the main Budget speech later that month and the next Presidential Investment Conference in March) to consistently and coherently create economic conditions in 2022 that are conducive to inclusive, job-rich growth.
These 10 policy-related building blocks could make a significant difference to South Africa – not only to its economy but also to its global standing, sense of self-worth and its future confidence.
Professor Raymond Parsons is an economist at the North-West University (NWU) Business School.
*The views expressed here are not necessarily those of IOL or of title sites.
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