Treasury revises GDP forecasts down amid global headwinds
Many of the risks we outlined in the February 2022 budget speech have materialised, Godongwana says
The National Treasury has revised down its GDP projections for SA, citing a softer global economic outlook, weak trade balance, protracted power cuts and inflation.
Finance minister Enoch Godongwana presented his mediumterm budget policy statement in parliament on Wednesday, where he said “many of the risks we outlined in the February 2022 budget speech have materialised”.
“Globally, these include rising inflation, tightening financial conditions and the ongoing effect of Covid-19, including the more stringent lockdowns in China and their impact on global demand and supply chains,” Godongwana said. “These were made worse by the outbreak of the Russia-ukraine conflict ... and in this context, small open economies like ours need to be especially careful and have solid fiscal buffers in place to weather the coming storm.”
He said the recent downward revision by the IMF of the global growth forecast for 2022 from 4.4% to 3.2%, and from 3.8% to 2.7% for 2023, means that the global environment will be less supportive of SA growth than anticipated at the time of the budget.
Because of these risks, Treasury now expects real GDP growth of 1.9% in 2022, compared with an estimate of 2.1% in February, Godongwana said. The economy is now expected to grow at an average of 1.6% over the next three years, he said.
“SA’S economy has underperformed for many years. Several long-standing structural impediments continue to hamper growth,” Godongwana said.
“These include unreliable electricity supply, costly and inefficient ports and rail network, crime and corruption, weak state capacity, and high levels of market concentration and barriers to entry that suppress the emergence and growth of small businesses.”
SA’S broad recovery after the Covid-19-induced crisis of 2020 was supported by higher global commodity prices, which improved export and fiscal revenues. Real GDP growth recovered to 4.9% in 2021 from a low base after a contraction of 6.3%.
The economy grew by 1.4% in the first half of 2022 compared with the first half of 2021 and contracted 0.7% in the second quarter.
Although real GDP grew more than expected in the first quarter of 2022, with output returning to prepandemic levels, the 2022 financial year has been marred with a deteriorating global environment, the floods in Kwazulu-natal and the Eastern Cape, industrial action in the electricity and mining sectors, as well as protracted and intense power cuts, which resulted in a broad-based contraction across most sectors during the second quarter.
Godongwana warned that the pace and scale of monetary policy tightening will also negatively affect economic output, while a further decline in Chinese economic growth could slow global demand and add pressure to global supply chains.
He said increased power cuts will compromise an already fragile and recovering economy.
The downward revision of GDP was also driven by weaker net exports, with the volume of imports outpacing that of exports, Godongwana said.
According to the medium-term budget report, the robust net trade gains that benefited the current account in 2021 are expected to dissipate in 2022.
Weaker external demand, easing of SA’S export commodity prices, and electricity and logistical constraints are expected to limit export volume growth in 2023, while it is anticipated that a slowdown in domestic activity will also constrain import volume growth.
Treasury warned that the high cost of living — inflation is at 7.5% — and weak economic growth will continue to weigh on the household spending recovery.
“With interest rates rising to rein in inflation, household spending is likely to moderate in 2022 and over the medium term.
Modest real private sector wage growth is expected as inflationary pressures ease,” Treasury said. Even though credit extended to households has recovered, rising borrowing costs will temper credit growth,” it said.
Godongwana said accelerating energy reforms could lessen the damage and support higher business confidence and investment.
He said speeding up economic recovery, including through Operation Vulindlela — an initiative to accelerate structural reforms and support economic recovery — was critical to narrow the gap between SA’S poor economic outcomes and its aspirations.