No power, no growth
South Africa looks set to deliver a lacklustre 2% GDP growth in 2022 as businesses and consumers face a long list of economic headwinds. In its 2022 economic outlook presentation, Nedbank CIB singled out domestic electricity supply constraints; the knock-on effect of continuing global responses to pandemic; and the topping-off of the commodity price cycle and resulting decline in net exports as reasons why we have no chance of repeating the 5% GDP growth pencilled in for full-year 2021. Last year’s outperformance was fuelled by surging commodity prices and an up-tick in global economic activity as lockdown restrictions were eased.
Eskom causing more trouble than C19?
“We have a 5% growth forecast for 2021 and 2% for the current year; in the past two months or so we have had to revise both expectations lower because of the constraints that have started to show,” said Reezwana Sumad, Economic Research Analyst at Nedbank. Readers might be shocked to learn that Eskom put more of a dent in the bank’s 2022 GDP growth projection than pandemic. “The increased severity of electricity constraints reduces our growth forecast for 2022 by about 20 basis,” says Sumad. Stage I and II load shedding are now so commonplace they form part of the base case, with the downward revision due to the increasing likelihood of Stage III or worse in the coming 12-months.
By comparison, the impact of the fourth wave of Covid-19 infections and recent global responses to the Omicron variant contributed to a mere 10 basis point downward revision to the GDP number. If you add the aggravation of repeated power cuts and the fact that Eskom is pushing for yet another double-digit price increase this year, it is fair to conclude that the power utility is hitting the average household budget harder than pandemic, for now.
South Africa seems stuck in 2% per annum growth cycle that could persist over a number of years. “Over the medium term, we think growth will remain very close to our potential, which is 2%, but there are downside risks attached to our forecasts and estimates,” said Sumad. These risks include uncertainty over future variants and waves of coronavirus and further slowdowns in global growth, with both the World Bank and IMF downgrading their forecasts for the coming year.
SA’s unemployment scars could be permanent
According to Nedbank, it will take South Africa between two and five years to reach pre-Covid19 employment levels, assuming we succeed in expanding formal sector employment by 2% or more per annum. “We have lost more than two million jobs over the past two years or so, with the bulk of these jobs in the formal sector … we think it is going to take longer for employment to recover,” said Sumad. The most recent Statistics SA Labour Force Survey puts South Africa’s unemployment at an alarming 35%, which measure will deteriorate further each year, even if we make progress towards our end-2019 position.
How can we tackle the unemployment challenge? The simplest response, and one that is oft-repeated by analysts and economists alike, is to achieve consistently higher growth. It will take a concerted effort from both government and the private sector to create the 5% plus growth that is needed to drive a jobs revolution. Government must deliver the structural reforms needed to enable economic growth and do whatever it can to fast-track the many infrastructure projects that have been tabled over the past three years. And the private sector will have to step up to the plate by funding and possibly managing these projects and making new fixed investments into the economy, rather than keeping piles of cash on their balance sheets.
The indicators advisers care about most
The three measures that our readers are most concerned with are inflation, interest rates and the local currency. These measures are important in clients’ financial decision making because they impact on both household budgets and investment return expectations. Clients, with guidance from their financial advisers, will have to revisit their monthly expenses and incomes and ensure that their investment portfolios are appropriate for a rising inflation and interest rate environment.
Global inflation is a hot topic at the moment and it seems the many analysts who labelled it ‘temporary’ or ‘transitory’ will be proven incorrect. In fact, an article on CNBC.com confirms that “the US inflation rate is at its highest level in 40-years and shows no signs of slowing down”. The US Bureau of Labor Statistics confirmed that the 0.5% hike in CPI in December 2021 was enough to “push the annual inflation rate to 7%”. And there are some alarming signs that our inflation could be on the rise too.
“We currently forecast 4.4% inflation for 2022, but this is highly dependent on the oil price and administered prices as a whole … there is still further upside to these inflation estimates,” said Sumad. Inflation is expected to creep marginally higher, to 5% in 2023. Electricity and oil could prove to be our undoing over the next 12-24 months, with the price per barrel of brent crude oil climbing steadily over the last 12-months. Do you remember the howls of protest when a litre of 95 octane petrol surged above R20 for the first time? Well, you can expect more of the same this year. And Eskom looks set for big increases too, yet again. To make matters worse, each Eskom price hike goes through the municipal ‘multiplier’ to hit your pockets even harder!
Brace yourself, rates are going up
As inflationary pressures build, the South African Reserve Bank (SARB) will have to consider increasing interest rates. And that is bad news for those of us who have variable interest rate loans and mortgages. The market is pointing to a 3% hike in the Repo rate over the next two years, with 2% in 2022; but most analysts expect the rating cycle to be less severe. “We expect a cumulative 75 basis points worth of hikes from the SARB this year, and the SARB will [most] likely move in lock-step with the US Federal Reserve,” said Sumad.
The consensus of a softer-than-expected rate hiking cycle is based on the poor economic growth outlook currently. “We do not think the economy is able to withstand an aggressive [rate hiking] cycle … the SARB will need to take a very hawkish approach to maintain inflation expectations over the medium term,” she said. PS: The phrase ‘hawkish’ refers to policymakers who advocate for higher interest rates as the best way to keep inflation in check. A central bank that takes a hawkish stance will usually hike interest rates at the first signs of rising inflation, with due consideration for the prevailing economic conditions. So, as the US Fed becomes more hawkish, South African consumers will be watching their every move, like a hawk.
And the rand will continue weaker
The rand is expected to continue its long-term weakening trend against other major currencies through 2022 and 2023, though it could strengthen somewhat against the US dollar over the first quarter. “The soft, hawkish monetary policy language and still quite large trade surplus will assist in keeping the rand within our fair value trading range over the next three months,” concluded Sumad. “Over the medium term, the rand and the South African economy will revert to the expected weakening trend bias … from a currency perspective, we are forecasting the rand closer to R16 per USD by year end, with further gradual weakness into 2023”.
Writer’s thoughts:
Making accurate predictions about the rand against the British pound, Euro or US dollar is a bit of a mug’s game. Our currency is notoriously volatile, and it is as likely to be at R14.50 to the dollar by year-end as R16.50… Any political shocks could send it to R20 per dollar or worse. What is your approach to forecasting foreign exchange movements for application in your clients’ portfolios? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
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