Investment turnaround may lead growth
● But progress on structural reforms needed to sustain boost this year, economists say
Robust growth in private investment spending could lift the economy this year, helping to counter the impact of a slowing household sector and a bleak global backdrop, economists say.
This comes after several years in which consumer spending has driven what growth there has been in the economy, while investment has declined.
But economists caution that the turnaround in private investment is being driven mainly by spending to replace or modernise plant and machinery, rather than on construction projects — and progress on structural reforms is needed to sustain the investment boost.
The Bureau for Economic Research (BER) saw private fixed investment growing by a real 5% this year and 5.1% in 2023, led by spending on machinery and equipment, with the green energy drive providing a further boost, BER economist Craig Lemboe said on Tuesday.
This is off a low base, after private investment plummeted by about 20% in 2020, recovering to grow by just 3% last year.
However, Lemboe said business confidence was now outperforming consumer confidence, which is unusual, and the BER’s latest survey of manufacturing shows growing interest in investment off a very low base.
Rand Merchant Bank economist Ettienne le Roux said each 1,000MW of new solar or wind energy meant private investment of R15bnR20bn.
This could mean private investment of R150bn to R200bn over the next few years if the government cleared the way for new renewable energy supplies.
“If you look at the renewable energy generation the mining sector plans to build and bid windows 5 and 6 as well as government’s emergency power procurement, it comes to [between] 10,000MW and 11,000MW of potential supply and investment spending.”
Some industries are sitting with ageing capital stock and clients are replacing old plant and equipment.
But removing obstacles could unleash quite a powerful response in terms of fresh investment, Le Roux said, and a huge amount of investment was needed just to get SA back to pre-Covid-19 levels.
Official data show 2021 was the first time that total fixed investment spending showed modest real growth, of 2%, after declining for six straight years, plummeting by almost 15% during the Covid-19 crisis in 2020.
Economic growth last year was led by a bounce in household spending.
But Lemboe said household spending growth would slow this year and into 2023, with real disposable income under pressure from higher interest rates and lower support from the fiscus.
The Reserve Bank will update its economic forecasts in today’s statement from the monetary policy committee.
It raised its economic growth forecast to 2% for this year at its March meeting, revised up from 1.7% at the time of its January meeting, but could cut this again in the light of rapidly slowing growth in China as well as worsening prospects for the US and global economies.
The BER’s latest baseline growth forecast is ahead of the bank’s at 2.4% for 2022 and 1.8% in 2023, but Lemboe cautioned it was done in April and was subject to downside risk.
The BER’s “low road” scenario predicts growth of just 1.5% this year and an average 1.7% over the medium term, if sanctions against Russia are broadened and the resulting supply shock leads to global stagflation and tighter financial conditions.
In its “high road” narrative, growth could reach 2.8% this year if SA can achieve an earlier rollout of green energy investment and improve its rail operations, enabling higher export volumes and real export growth even if commodity prices decline.
Lemboe said the probabilities were weighted towards the downside or baseline scenarios, not the upside one.
While the low road could be triggered quickly if the global geopolitical environment soured, the reforms required for the high road scenario would take time to filter into the real economy and benefits would be seen only at the latter end of the forecast.
A huge amount of investment is needed just to get SA back to pre-Covid-19 levels