SA, reporting under a new methodology, recorded economic growth higher than economists predicted in the second quarter, prompting one of the country’s biggest insurance companies to revise its already bullish forecast for 2021.
However, SA’s economy remains smaller than it was before the Covid-19 outbreak and is still vulnerable after the country was plunged into chaos by riots in July. It is also questionable whether the economy can sustain the sort of growth needed to deal with the world’s highest unemployment rate.
Old Mutual chief economist Johann Els, who was among the first to predict a strong economic recovery in 2021, raised his forecast even higher, predicting a 5.5% GDP increase for 2021. Els, who forecast 5% growth in early March, told Business Day on Tuesday that there is also significant “upside risk” to his 5.5% forecast.
“When I said the economy would grow 5% people thought I was mad,” Els said in an interview. “We’ve seen strong rebounds in data such as the manufacturing PMI as well as car sales,” he said referring to the purchasing managers’ index. “I suspect we will see upward revisions to a lot of economic forecasts for 2021 growth.”
Old Mutual’s revised prediction came after Stats SA said the economy had expanded 1.2% in the second quarter of 2021, with the transport, storage and communication industries making the biggest contributions.
The expansion was based on a new reporting methodology adopted by Stats SA, which no longer reports GDP growth on a seasonally adjusted annualised basis and uses 2015 as its base year for calculations. That means at face value the level of growth looks modest.
The new seasonally adjusted quarter-on-quarter expansion follows a 1% increase in GDP recorded in the first three months of 2021, which was marginally above the 0.9% predicted in a Bloomberg survey. Unadjusted real GDP for the first six months of 2021 increased by 7.5% from the same period a year ago.
Els said the 1.2% quarter-on-quarter expansion would translate into a 4.7% growth rate when measured on an annualised basis as per the previous method used by Stats SA, a sign that the economy still had strong momentum.
SA’s economy contracted a revised 6.4% in 2020, resulting in more than a million job losses, after the Covid-19 pandemic forced businesses ranging from restaurants to mines and factories to shut for months. Nevertheless, revised calculations on the size of SA’s economy released by Stats SA in August show the economy is 11% bigger than previously thought.
Stats SA’s second-quarter GDP data show that on an unadjusted year-on-year basis the economy expanded 19.3% in the second quarter of 2021 when compared with the same period in 2020.
That was the first year-on-year increase in five quarters and reflects the so-called base effect, whereby data rebounds from a very low base caused by a sudden downturn.
In the case of SA that sudden downturn was in the second quarter of 2020, which coincided with SA’s first hard lockdown and saw the economy shrink by 16.8%.
The second-quarter GDP data may be revised later because Stats SA was unable to accurately account for mining data after the department of mineral resources & energy failed to provide it with June mining sales figures on time.
Third-quarter GDP data may be affected by the looting and unrest that swept across KwaZulu-Natal and Gauteng in July, though Old Mutual does not expect this to have a significant impact on the overall growth rate for 2021. “In the grand scheme of things the unrest will probably turn out to be a small blip,” said Els.
However, not everyone agrees. Investec economist Kamilla Kaplan forecasts GDP growth of 3.9% in 2021.
“Growth would have likely been higher this year in the absence of the damage to economic capacity caused by the civil unrest in July,” she said.
The SA Reserve Bank in July kept its 2021 GDP growth forecast unchanged at 4.2% and said it does not expect a return to pre-pandemic levels before 2023.
SA needs to foster much stronger economic growth to help remedy a record unemployment rate that reached 34.4% in the second quarter.
With Covid-19 still raging and vaccine hesitancy hampering efforts to stamp out the pandemic, it may require far more aggressive policy reforms by the government to see growth translate into job creation.
“The only way to reduce unemployment is to have a sustained high rate of economic growth for many years, and even then it could take a decade or two to really make a difference,” said Els. “We need policy reforms such as greater deregulation of the labour market if we want to make a meaningful dent in unemployment.”
Update: September 7 2021
This article contains additional information throughout.
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