OECD is upbeat on SA growth outlook

The Paris-based Organisation for Economic Co-operation and Development (OECD) says it remains “more optimistic” about SA growth prospects, expecting private investment to rise as companies replace increasingly obsolete capital stock.

OECD secretary-general Mathias Cormann said social transfers, better employment prospects and falling savings rates are expected to sustain private consumption in SA in the face of high inflation and tighter 2023/2024 financial conditions.

The OECD released its economic growth outlook for the Group 20 (G20) countries on Tuesday. SA is the only African member state.

Cormann said that unlike the World Bank and the IMF, which have warned that global economic growth could slow to less than 2% in 2023 and some major economies could face a recession, the OECD does not forecast a global recession but rather “a period of pronounced weakness.

“Global growth [for the G20] in 2023 and 2024 will experience a very challenging outlook. There will be some negative quarters and risks have risen, but we are very confident in our forecast,” said Cormann.

According to the OECD economic outlook, the global economy is projected to grow well below the outcomes expected before the war in Ukraine, at a modest 3.1% this year, before slowing to 2.2% in 2023 and recovering moderately to a still subpar 2.7% in 2024.

Inflation is projected to remain high in the OECD area, at more than 9% in 2022.

As tighter monetary policy takes effect, demand and energy price pressures diminish and transport costs and delivery times continue to normalise, inflation will gradually moderate to 6.6% in 2023 and 5.1% in 2024, said Cormann.

In comparison, SA’s GDP is projected to grow 1.7% in 2022, 1.1% in 2023 and 1.6% in 2024. Private consumption and investment are expected to remain the main drivers. Household spending will remain supported by social transfers and an improving labour market.

At a media briefing after the launch of the report, Cormann said: “The OECD is more optimistic, certainly more than the National Treasury and the Reserve Bank, regarding private investment growth in SA in 2020 and 2023. Private investment is yet to recover to prepandemic regions, and so far its growth has continued to grow despite tighter financial conditions.

“We project this will continue to the end of 2022 and into 2023. In fact, there is a large stock of obsolete capital to be replaced, including the energy sector, which will draw a level of investment that will help provide support,” said Cormann.

SA inflation is projected to fall slowly in response to tighter monetary policy, but he warned that risks to growth remain. “These include prolonged electricity shortages and more persistent inflationary pressures than expected, potentially delaying the reduction of policy rates.”

He said that real interest rates at current inflation levels remained positive, and this was also taken into account.

“Also, the OECD welcomes the announced extension of the SRD [social relief of distress] grant,” he said.

“The commodity boom and elevated inflation have also led to higher tax revenues for SA, higher tax revenues than expected and a larger primary surplus than initially planned which gives some temporary fiscal space that continues to pour on the most vulnerable.”

These sentiments are further confirmed by the Reserve Bank’s six to 12-month economic tracking indicator released on Tuesday. The Bank’s composite leading business cycle indicator shows that momentum in economic activity increased 1.4% on a monthly basis, rebounding from a 2.3% fall the previous month.

Bank data showed that five of the nine available component time series increased while the remaining four decreased.

The largest positive contributors were an acceleration in the six-month smoothed growth rate of job advertisement space and an increase in the number of residential building plans approved.

The largest negative contributors were a deceleration in the six-month smoothed growth rate of new passenger vehicle sales and slower year-on-year growth in the composite leading business cycle indicator for SA’s main trading partners.

Investec chief economist Annabel Bishop said positive momentum in activity suggests that third-quarter GDP may rise 0.4%. She warned that economic growth is still expected to slow materially in 2023, to 1.3%, as global demand weakens.