SA BRACES FOR 2% GROWTH IN 2022

s countries around the world begin to unwind supportive fiscal and monetary policies, 2022 will be the first proper year of economic normalisation after the onset of the Covid pandemic, assuming no nasty new variants emerge.

While global growth is likely to cool by about a percentage point as a result compared with the rapid bounce-back in 2021, average consensus forecasts remain robust at 3.9% for developed countries and 5% for emerging markets.

But SA’s growth is likely to drop much more steeply, by about three percentage points — the consensus forecasts are from about 5% in 2021 to 2% in 2022. This is because, like other non-oil commodity exporters, SA will bear the brunt of the expected deceleration in global demand and a related softening of commodity prices.

In addition, ongoing electricity supply constraints and political noise will likely continue to depress business confidence, preventing a rebound in fixed investment, while sky-high rates of joblessness will keep a lid on consumer spending.

“This is not the rebound year,” says Momentum Investments economist Sanisha Packirisamy. “The economy has to stand on its own two feet and it’s not easy to see [how it’s placed]. SA’s structural pillars look weak.” But first, the good news.

The impact of the Omicron variant on the SA economy has been much milder than expected, and government’s reaction in rapidly loosening lockdown restrictions at the end of December has buoyed sentiment and minimised the economic fallout. For though domestic business activity fell sharply in response to the Omicron wave during December as firms were hit by a loss of consumer confidence and renewed international travel restrictions, it could have been much worse.

SA’s purchasing managers’ index returned to sub-50 territory in December, dropping to 48.4 index points from 51.7 in November. However, according to IHS Markit economist David Owen, in comparison with previous waves the latest downturn in activity was relatively subdued, showing that the looser lockdown measures helped to buffer the economic impact of Omicron.

Moreover, Owen says confidence regarding future output remains strong and above the trend, with firms stating they expect activity to recover quickly as Covid case numbers decrease and vaccine uptake rises.

With health experts guiding economists

Atowards the view that future Covid variants will likely get milder, allowing economies to open up fully this year, Investec economist Annabel Bishop concludes: “Covid-19 is unlikely to prove to be an impediment to economic growth in 2022 for SA.”

Absa’s Peter Worthington is even more bullish, saying that “unless a new, more pathogenic variant emerges, my sense is that 2022 will see the end of the pandemic”.

Though the emergence of a more virulent variant is a key risk to both the global and domestic economy in 2022,

Worthington feels that, for SA, “the even more important economic question is whether we will get significant reform acceleration in a manner which materially lifts business confidence and thus sparks an investment recovery”.

The consensus view among private SA economists is that though government is moving in the right direction with its key energy, spectrum and logistics reforms, the pace is too slow to lift the ever-present risk of load-shedding or shift the dial on growth any time soon.

Worthington laments that some parts of the electricity reform agenda (including the rules to govern wheeling — the transporting of electrical power) are up in the air, the procurement of new energy supply (bid window 6) remains sluggish, and policies in government departments and Eskom are often inconsistent with one another.

On many other important structural reforms (including those regarding mining licences, the visa regime and construction extortion rackets) “the government is seemingly making little progress”, Worthington adds, “while other necessary reforms, like those to the labour market, are not even up for discussion”.

Both Absa and Momentum Investments are forecasting real GDP growth of 2% for SA in 2022, declining to 1.8% in 2023. Their

2023 forecast is about half a percent weaker than the prevailing consensus expectation.

Packirisamy says this reflects her concern that the pace of structural reform could remain slow. This is not to say that there isn’t any room for a little upside surprise on growth. For instance, reforms to Transnet that increased capacity and reduced port charges could boost SA exports, she notes, while an improvement in energy availability could increase fixed investment.

However, Packirisamy hasn’t embedded this upside potential into her medium-run growth forecast, given the government’s

If last year represented SA’s rebound from the Covid crisis, 2022 is more likely to represent the hangover. Economists expect another tumultuous year, unless economic reform gains momentum

track record on reform and because the structural underpinnings of the SA economy and business confidence remain weak.

The major impediment to faster growth is SA’s declining levels of fixed investment. The fixed investment-to-GDP ratio slipped to 13% in the middle of 2021 from 19% at the end of 2013, and remains well below SA’s emerging-market peers (see graph).

Also counting against SA is the fact that nonoil commodity exporters are expected to bear the brunt of the global growth slowdown in 2022 through lower demand and prices for commodities. SA is particularly exposed to China, whose growth is coming off the boil as it shifts its policy focus from rapid growth at any cost to the quality and durability of that growth.

The SA consumer cannot be relied upon to provide much of a kicker to growth either.

Though a faster than expected rebound in wages spurred household spending in 2020, high rates of unemployment and tepid credit growth as the Reserve Bank normalises interest rates should keep a lid on household spending in 2022, says Packirisamy.

Fortunately, the consensus expectation is for SA inflation to remain benign, given wellanchored inflation expectations and the pedestrian growth outlook. This should moderate the coming interest rate hiking cycle.

However, the broader point is that whereas in 2021 both fiscal and monetary policy were supportive, in 2022 they will both become a drag on growth.

Of course, this assumes the state sticks to its fiscal consolidation path. If the social relief of distress grant is extended by more than R350 a person a month, it could contribute meaningfully to consumer spending at lower income levels — but the trade-off would be delayed debt stabilisation, which would raise SA’s fiscal risk profile.

Globally, the unwinding of fiscal and monetary policy support will be the major theme this year.

“The main risk is that inflation does not come down as much as expected, triggering a classic policy-driven recession,” says Bank of America Securities (BAS) global economist Ethan Harris.

This is not his base case, however. He expects inflation to drop below central bank targets in most major economies in the coming year as supply backlogs ease and labour markets normalise. This would allow most parts of the world to get away with a relatively benign tightening cycle.

The US is the notable exception. Even as short-run supply restraints are likely to ease, Harris expects that very rapid demand growth will cause the US economy to breach full employment and potential GDP by the middle of next year.

“Finally, at some point, the Fed will need to admit that the rise in inflation is not all temporary, and it will need to tighten in a way that creates some restraint on financial conditions,” he says. “It has been a long time since investors experienced a get-tough Fed tightening. This could get interesting.”

Fed minutes from mid-December warn that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated”.

BAS expects eight 25 basis point rate hikes, one at every other meeting, from June 2022 to March 2024. But this doesn’t suggest that the world is facing another global recession in a replay of early 2020.

“The growth outlook remains positive, and policymakers will be sensitive to how their actions affect their respective economies,” says Harris. “Growth forecasts for the global economy and major individual countries remain quite robust for 2022, but the risks have increased that these forecasts might end up revised lower.”

For an emerging market such as SA, there is no escaping the fact that tighter global fiscal and monetary policies will make financial conditions more onerous this year.

But whereas the biggest global risk is sticky inflation, for SA the main internal risk remains Eskom. Though SA’s energy supply constraint is expected to be reduced over the medium term, it will remain a cap on near-term growth. Nor can SA rule out the possibility of fresh acts of energy and economic sabotage, given the fraught political cycle.

Worthington is also wary of the potential effect of politics on the economy this year.

“Politically, with the ANC elective conference at the end of the year, a huge push-back from the radical economic transformation faction … and little accountability so far for those guilty of state capture or of orchestrating the insurrection in July, I think SA will likely see another tumultuous year,” he warns. “This will continue to weigh on business sentiment.”

The bottom line is that with the global environment becoming less supportive, SA is set to be a laggard in terms of its economic recovery, unless bolder and more urgent steps are taken to ease the energy constraint and boost business confidence and fixed investment.

This is not the rebound year. The economy has to stand on its own two feet and it’s not easy to see [how it’s placed]

Sanisha Packirisamy