Policy uncertainty improved slightly in the third quarter due to better-than-expected GDP growth and lower inflation — which is now within the Reserve Bank’s 3%-6% target range — but still remains well above the desired level that drives investor confidence.
A report by North-West University shows policy uncertainty eased to 71.8 in the third quarter from its historical high of 76.2 the previous quarter but still points to the high degree of volatility and uncertainty present in SA’s growth dynamics, especially as heavy load-shedding resumed for most of September.
North-West University professor Raymond Parsons said household finances also remain under strain. With headline inflation and producer inflation rising again in August, it suggests that inflation may be “sticky” for the time being, keeping the repurchase rate higher for longer.
“Monetary policy remains restrictive. Consumer spending is under great pressure. High-frequency economic data, such as retail sales and credit demand, have weakened as a result of higher borrowing costs and inflation, which have squeezed disposable income,” Parsons said.
“There is also the unfolding scenario of ‘a tale of two deficits’ for SA in the period ahead in both the balance of payments and public finance spheres.”
Parsons said another negative factor is the renewed sharp deterioration in the country’s public finances and the uncertainty attached to how the National Treasury will manage its medium-term budget policy statement on November 1. “The fiscal outlook is now much worse than projected in the February budget and weak corporate taxes and the higher public sector wage bill are the primary culprits.”
He said that at its latest monetary policy committee meeting, the Reserve Bank warned that serious fiscal sustainability concerns will raise SA’s risk premium, leading to elevated interest rates.
“The Treasury is now wanting an overall ‘freeze’ on public sector spending at various levels, but the full impact on the economy remains uncertain until the fiscal picture becomes clearer,” he said. “The policy statement needs to provide certainty as to how heightened fiscal risks will now be managed in the context of low tax revenues and high government spending.”
He said that with national elections pending in 2024, fiscal decisions announced during the policy statement are likely to be a tug-of-war. “And tough policy trade-offs are needed,” Parsons said.
Business confidence
A policy uncertainty index above 50 reflects heightened uncertainty, while a decline in the index means reduced uncertainty. The index, launched in early 2016, has become central in recent economic debate in SA. Policy uncertainty has important implications for business confidence and the investment climate in the country.
“When economic policy uncertainty is strongly present in the environment, it lowers investment, employment and output. High levels of such policy uncertainty inhibit meaningful investment and consumption.”
The second deficit threatening SA is the balance of payments, he said.
Parsons said that while many negative factors continue to shape the policy uncertainty reading, some positive indicators helped ease it to its current level. Better-than-expected GDP growth of 0.6% in the second quarter was again good news, he said. And economic growth forecasts for 2023 as a whole are now converging on about 0.6%-0.7%, from 0.1%-0.4% previously.
The Reserve Bank’s composite leading business cycle indicator also increased 0.1% in July, reflecting a measure of resilience in the economy.
“The outlook in the agriculture sector is also broadly positive. And fixed capital formation generally also appears to now be showing a more positive trend,” he said.
“Negative trends like policy uncertainty are reversible and remediable,” he said. “Stronger economic growth now requires multitiered good news on the implementation front, especially on the energy outlook.”
Parsons said SA must urgently implement policies to promote a stronger economic turnaround in the months ahead.
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