THE GOOD NEWS GROWTH SHOCK
The view that SA’s economy is set to remain mired in stagnation after the pandemic is rejected by some economists, who believe the tide is turning on a host of negative trends that have impeded growth
Old Mutual chief economist Johann Els could be described as an eternal optimist — a label he concedes is not without some truth.
But he is feeling vindicated as an increasing number of economists raise their 2021 growth outlook owing to the official upward revision to the size of SA’s GDP as well as the economy’s unexpectedly robust second-quarter performance.
Els has long been forecasting that the economy will bounce back to growth of 5% or more this year. But what has surprised nearly all economists, including Els, has been the strength of exports on the back of the commodity boom and the resilience of the SA consumer.
Old Mutual now foresees that the economy will snap back to grow by 5.6% on average this year. The consensus figure is shifting too — up from about 3.5%-4% — and is likely to settle at about 4.5%-5%.
Els considers a figure of 4.5% too pessimistic, as it assumes the economy will perform very poorly in the second half of the year — something he finds counterintuitive because of the sharp rebound in activity indicators after the
July unrest.
He is assuming that real GDP growth will be 0% in the third quarter because of the negative impact of the unrest and the Transnet cyberattack on production and confidence. But even if the economy contracts by as much as 3% in the third quarter, and then fails to grow at all in the final quarter, he still arrives at a 5% growth rate for the year.
“I’m not trying to be clever,” he says, “I’m just doing the maths.”
Last year, Els took a lot of flak, even from within his own organisation, for predicting that SA would experience a V-shaped recovery. At the time a lot of people thought the economy would drift sideways after the pandemic. But he’s been proved correct.
He was also derided for forecasting in midMarch, when the rand was at about R17.50/$, that it would recover to a level stronger than R14/$ by the end of the year. In fact, it got to about R13.60/$ at its strongest point.
“Maybe I’m a bit more optimistic than the rest, but I have valid reasons to be,” says Els. “I feel strongly that the tide has turned; that a lot
of negative trends have ended and are starting to turn positive. This will help to lift growth.”
In short, Els contends that the view that the SA economy is set to remain mired in stagnation is an old, backward-looking narrative that needs to be put aside.
Looking forward a year or two, his view is that whether one considers Covid, electricity, policymaking or politics, “the headwinds are slowing down and the tailwinds are picking up”.
Els expects SA’s growth rate to average 2.3% over the medium term. This would be significantly better than during the state-capture years (2015-2019), when growth averaged a dire 1%.
But, as with all economic forecasts, there are caveats. It assumes that SA will experience a fourth wave of Covid in December/January, but that any resultant lockdown restrictions will, like the recent level 3 rules, be limited in their economic impact.
He is not expecting significant new waves of infection next year and, thanks to the rising number of vaccinations, certainly not a repeat of the high levels of hospitalisation and death that SA experienced in 2020 and 2021. This will allow the government to end the state of disaster in the first half of 2022 and cease imposing new lockdowns, he believes.
Els also expects the consumer recovery to continue (premised on a slow normalisation of interest rates) and for commodity prices and exports to remain fairly strong well into next year, underpinned by a robust global recovery.
He is bullish about agriculture, saying other economists may be failing to factor in the positive effect that record crop production will continue to have on SA’s growth rate after years of drought.
And he expects the manufacturing sector to make a comeback, given that SA’s purchasing managers indices are recovering strongly, consumers’ balance sheets are look
ing better and firms will have to raise production to restore their depleted inventories.
The swing in the inventory cycle alone could provide a big kicker to SA’s growth rate next year.
Meanwhile, household finances, the ultimate driver of consumer spending, have been much more resilient than feared throughout the pandemic despite the loss of 1.5-million jobs. This is mainly because most job losses have been concentrated among low-wage earners and those who have kept their jobs have done reasonably well.
On the policy front, Els is encouraged by the thawing in the government’s reluctance towards greater private-sector participation in the state-owned-enterprise sphere, not least its decision to raise the cap on energy self-generation to 100MW.
He expects that an improving political and policy environment, and growing reform momentum, will slowly result in a fixed investment upswing, fuelled by huge expected private investment in renewable energy. This should reduce the burden of load-shedding on the economy.
“Yes, it’s taken a long time because of weak state capacity, but [the SA Revenue Service] is better and the [National Prosecuting Authority] is better, so a lot of things are turning the corner,” he says. “More than a handful of things are coming through that will help lift growth.”
And while he concedes that many factors continue to constrain the economy, he believes it’s too easy to become hung up on the negative: SA must start looking beyond its Covid stagnation, towards a future in which a 2%-plus growth path is achievable.
Bureau for Economic Research (BER) chief economist Hugo Pienaar is only slightly less bullish, holding a view more in line with the prevailing consensus. He will wait until after the release of the Reserve Bank’s Quarterly Bulletin at the end of September before revising his GDP forecast, but he expects that it will need to go up from the current 3.9% to about 5%.
Where the BER differs from Old Mutual is over the likely third-quarter GDP print, with Pienaar expecting real GDP growth to contract outright quarter on quarter, given all the shocks the economy suffered during that period.
But even with a 3% decline in the third quarter, Pienaar concedes it is still relatively easy to arrive at a growth rate of about 5% for the year. In fact, “a figure of about or just below 5% now almost looks like the minimum for 2021”, he says.
Of course, much will depend on whether
SA is able to maintain the pace of vaccination, which would mute the impact of a “highly likely” Covid fourth wave later in the year. How long it takes for firms that were damaged by the unrest to receive insurance payouts and rebuild also matters.
But Pienaar fully shares Els’s optimism over SA’s medium-term outlook. He also expects GDP growth to average 2.3% over 2022 and 2023 as the economy normalises and international tourists return on the back of an ongoing global recovery.
His forecast assumes that SA’s vaccine rollout continues apace, putting the country on the front foot next year in its fight against the virus. It also assumes that though commodity prices may come off the boil somewhat, they won’t drop significantly, so exports will remain supported.
Like Els, Pienaar is also mainly pinning his hopes on a fixed investment upswing. He says South Africans shouldn’t underestimate the positive effect that the expected wave of green fixed investment could unleash.
Not only does the boost to investment, construction and job creation from the new 100MW self-generation projects have the potential to raise SA’s growth rate directly — as does bid window 5 of the renewable energy programme — it should also reduce the risk of load-shedding across the entire economy.
This is a growth driver that was not around in 2015-2019, and explains why Pienaar isn’t expecting growth to drop back below 1% after the pandemic, despite the loss of firms and jobs this has caused.
“Once we move past Covid, to think of going back to the [Jacob] Zuma era — the peak of state-capture, with dreadful business and consumer confidence — is almost too ghastly to contemplate,” says Pienaar. “That would be a really dreadful outcome.”
He estimates that if the economy had managed to grow by 3% a year during the 20152019 period, instead of by less than 1%, SA’s real GDP would have been R360bn — 11.5% larger — by 2019 (see graph).
This illustrates what a dramatic impact just raising SA’s growth rate by one or two percentage points can have, says Pienaar, and underlines why SA needs to accelerate its reform momentum.
For though a 2%-plus growth rate would be a significant improvement and mean SA is generating positive per capita growth for the first time in years, it is still not fast enough, given SA’s 34.4% unemployment rate.
I feel strongly that the tide has turned; that a lot of negative trends have ended and are starting to turn positive. This will help lift growth
Johann Els