As SA posted its biggest annual rate of growth in 14 years, economists warned there are constraints on the outlook.
To locally driven structural weaknesses, highlighted again as Eskom resumed rolling power cuts on Monday, they have added Russia’s invasion of Ukraine, which pushed the oil price beyond $130 a barrel. That could cause an inflation spike locally and force the Reserve Bank to accelerate interest rate hikes, a concern that’s already reflected in bond yields spiking to their highest level since the Covid-19 outbreak.
SA’s economy has an unemployment rate of close to 35% and is yet to recover to its levels before the 2020 outbreak of Covid-19, meaning that higher borrowing costs could hobble the recovery.
Stats SA on Tuesday said GDP grew 1.2% in the last three months of 2021 relative to the previous quarter, rebounding from a revised contraction of 1.7% between June and September, a period in which the country was plunged into unprecedented riots and looting.
For the full year, GDP expanded at 4.9%, the biggest increase since 2007 — before the global financial crisis. SA struggled to emerge from that crisis in the following decade, with its economy marked by sluggish growth and state capture, even as other countries recovered strongly.
The Stats SA data showed that the rebound in the fourth quarter was broad-based, with five out of 10 sectors recording a positive growth rate, primarily led by the personal services, agriculture, manufacturing and trade sectors.
Mining, one of the star performers for 2022 as a whole, was among those that contracted, partly reflecting the need for quicker structural reforms. Weaknesses in the rail and port infrastructure have meant that miners weren’t able to take full advantage of surging prices for their product. GDP growth in 2021 was slightly above the 4.8% forecast of the Treasury and the Reserve Bank.
The outlook for 2022 is likely to be “pressured by escalating global food and energy prices ... in the coming months”, said PwC economist Christie Viljoen.
He said a major concern was that the bounce-back in 2021 was essentially a jobless recovery. That means SA has hardly recovered any of the more than 1-million jobs lost as a result of the lockdowns instituted by the government.
“People should be very concerned that SA’s unemployment rate — now the highest in the world — could continue rising in 2022. This carries with it even more social pressures that need to be resolved to secure stability in our society,” Viljoen said.
Citadel’s chief investment officer, George Herman, noted that the economy is still at the same level it was five years ago. He said the construction sector, which usually creates jobs, was a major disappointment of the 2021 GDP numbers with its contraction of 1.9%.
Financial markets largely failed to react to the data, with the rand and the JSE responding to global events.
SA’s currency, often seen as a barometer of sentiment towards emerging markets, has this time been supported by higher metals prices. It gained almost 1% to R15.2102/$ by 7.25pm, pushing its 2022 gain to 4.8%.
The JSE all share index fell 1.2%. Even with its 1.8% drop in 2022, it’s still doing better than the S&P 500 in the US, which has dropped 1.8%.
It is in the bond market, which is most sensitive to the outlook for inflation and interest rates, that the danger signs are flashing. The yield on the R2030 bond, which moves inversely to the price, has jumped more than 60 basis points in the past two days and on Tuesday was at 10.28%, the most since early April 2020 during the most severe period of the lockdown.
Nedbank chief economist Nicky Weimar said the GDP expansion and the business-positive national budget last month “are likely to be tempered by Russia’s war on Ukraine and the dramatic surge in global oil and grain prices”.
She said for SA, the inflation outlook could convince the monetary policy committee to move more aggressively than anticipated at present. “These possibilities are likely to weigh on local business sentiment and introduce considerable uncertainty to the economic outlook.”
Saul Levin, executive director at Trade & Industrial Policy Strategies, an independent, non-profit research institution, said SA should expect more volatility. “The Russian invasion of Ukraine has led to a speculative spike in commodity prices, which both pushes up fuel costs — SA’s largest import item — and boosts the value of our exports.”
He said the crisis may also lead to slower growth in developed markets, which is likely to affect SA.
But apart from the Russian-Ukraine crisis, SA’s long-term structural challenges loom large, with Eskom this week implementing the second round of load-shedding for the year after multiple breakdowns at its fleet of coal-fired power stations.
On Tuesday, the utility had unplanned breakdowns of 16,505MW.
To supplement generation capacity and limit load-shedding to stage 2, it has been making extensive use of its emergency generation fleet, which includes open-cycle gas turbines that run on diesel.
Eskom has previously said that every day of stage 2 load-shedding costs the SA economy about R470m.
Weimar said: “It is very difficult to grow on a sustainable basis without access to secure and affordable electricity.”
The local bond market “got a bloody nose”, Deon Kohlmeyer, a trader at RMB, said in a note early on Tuesday. “These are moves reminiscent of early 2020, when the effects of Covid on the global economy were first starting to be felt” though the moves have been less aggressive so far, he said.
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