World Bank warning comes as bad news for the SA economy

The World Bank has warned of a potential fall in the global economy’s growth to its lowest point in three decades over the rest of the 2020s. This is bad news for an SA economy stuck on a low-growth trajectory for more than a decade and where governance is weak in finances and human capabilities.

Although SA’s economic growth rate has long stopped tracking global growth, the vibrancy of the global economy still matters. The small SA economy depends on global markets for sustenance, particularly for the export of mineral and agricultural products and access to finance.

The World Bank warning comes as major economies raise interest rates to stem inflation. Government budgets have been squeezed by higher debt, driven partly by support for economies in the pandemic. SA has been raising rates and trimming public spending, the latter meaning the government won’t have much financial muscle to cushion the economy.

As countries dealt with the aftermath of the pandemic and runaway inflation a decline in long-term growth prospects was “brewing quietly”, according to a new World Bank publication, “Falling Long-term Growth Prospects: Trends, Expectations, and Policies. “Across the world a structural growth slowdown is under way: at current trends, the potential growth rate — the maximum rate at which an economy can grow without igniting inflation — is expected to fall to a three-decade low over the remainder of the 2020s.”

The bank says all drivers of global growth and prosperity since the early 1990s weakened, “not solely because of a series of shocks to the global economy” over the past three years. It warns that broad-based decline in long-term growth prospects “imperils the ability of emerging markets and developing economies” to reduce poverty, deal with climate change and meet their other development goals.

The weakness in global growth could be even more pronounced, the bank says, if any of the major economies were to have a financial crisis, especially if it were to trigger a global recession. As the past two decades have shown, financial crises and recessions leave deep economic craters.

“It will take a herculean collective policy effort to restore growth in the next decade to the average of the previous one … At the global level, given the cross-border nature of many challenges confronting growth, the policy response requires stronger co-operation, larger financing, and re-energised push for mobilisation of private capital.”

This is bad news for a country like SA, which barely tackles constraints slowing the economy as summarised in the March 2023 Quarterly Bulletin published by the Reserve Bank. The economy had “significant supply constraints over the past decade”, it said, including severe, intensifying disruption of electricity supply and “gradual deterioration” in rail infrastructure.

The electricity problem has two causes: long delays in completing Medupi and Kusile power stations and recurring collapse of aged power stations. These two factors outweighed the addition of renewable energy to the national grid. The bulletin says the price of electricity rose 241% since December 2009, far outstripping the rise in the consumer price index (92.8%) in the same period. “The rapidly rising cost and unreliable availability of electricity in SA has become a growing constraint to output growth in the domestic economy,” the bulletin said. According to the Bank’s monetary policy committee, the power shortages and poor rail network will shave two percentage points off SA’s economic growth in 2023.

THE GLOBAL ECONOMY’S GROWTH COULD FALL TO ITS LOWEST LEVEL IN THREE DECADES

The World Bank’s warning comes when the SA economy is hobbled by domestic constraints and government is at its weakest, a point made sharply by Bank governor Lesetja Kganyago last September. “Much as I wish we had a strong state that could deliver high-quality public goods at reasonable prices, the facts reflect otherwise. Relative to the 2000s, we have a weaker state, spending a larger share of GDP. The result is an economy barely capable of growth faster than 1%, with a shrinking tax base and a weak outlook.” That and a slowdown in global economic growth mean SA’s prospects are bleak.