The South African Reserve Bank (Sarb) cut the country’s GDP forecast by half for the next two years on Thursday, largely due to austerity measures.
The report highlights the unintended impact of the growing power supply crisis on the economy.
GDP forecast
Delivering the first Monetary Policy Committee (MPC) statement of the year, Governor Sarb Lesetja Kganyago said the central bank now estimates that South Africa’s 2023 GDP will grow by a modest 0.3%, due to “extensive load shedding” as well as other logistical constraints.
The bank’s previous forecast for GDP growth was 0.6% this year and 1.4% in 2024. The current GDP growth forecast for 2024 is only 0.7%, and it has reduced its growth forecast for 2025 from 1.5% to 1%.
This significant downward revision comes as load shedding has increased to unprecedented levels, with multiple power outages occurring daily for weeks now.
The Sarb also forecast no growth for the fourth quarter of 2022, despite the economy growing by 1.6% in the previous quarter.
Official GDP figures for the last quarter of 2022 and the year as a whole have not been released, but the bank estimates that 2022 growth will reach 2.5%.
Effect of load bearing
“The forecast takes into account the high level of open shedding, and more modest household spending and investment growth than before,” said Kganyago.
The Sarb raised the repo rate by 25 basis points to 7.25%, in the eighth increase since the MPC began raising rates to curb rampant inflation, effectively pushing the key lending rate to 10.75%.
During the repo rate announcement, Kganyago added that the GDP forecast takes an increased burden each year, relative to what was assumed during the previous MPC meeting in November.
More power outages…
In 2023, 250 days of relief have been printed (from 100 days).
For 2024, the previous forecast of 40 days has been increased to 150.
And by 2025, the load shedding will occur within 100 days, according to the bank.
This week, South Africa was pushed into a permanent blackout, which the country’s electricity utility Eskom said would last for up to two years, to allow space to repair damaged infrastructure.
“While economic growth has been volatile for some time, the outlook for growth appears even more uncertain than normal,” said Kganyago.
“A material reduction in open shedding will significantly increase growth,” added the governor.
He said it was still difficult to quantify the full impact of the burden, but admitted it was “increasing inflationary pressures on business costs and the cost of living for households”.
He made the comments during a media briefing following the MPC’s announcement on Thursday.
“Burden shedding not only affects growth, it is a conundrum, a dilemma facing South Africa…
Energy crisis seeps into SA’s food supply
Commenting on the Sarb’s sharp downward revision of GDP, chief economist at Sanlam Investments Arthur Kamp said the forecast was “far below the level required for a significant and sustained reduction in the unemployment rate”.
“The low rate of economic growth in South Africa cannot be attributed to monetary policy. However, the lack of reliable energy supply, infrastructure congestion and high levels of government debt, which hinders private sector investment, are the main problems,” he said.
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Carmen Nel, an economist at Matrix Fund Managers, noted that the Sarb’s concerns about electricity supply show that there are doubts about the government’s ability to find a solution to the crisis.
“[The] Sarb clearly does not factor in many good chances of resources. Electricity constraints, weak global growth, lower commodity prices, and depressed sentiment lead to weaker growth prospects. This, in turn, is expected to reduce inflationary pressures,” he said.
Luigi Marinus, portfolio manager at PPS Investments, commented:
“Local GDP growth is expected to be 0.3% compared to the previous forecast of 0.6%. The MPC estimates that the open burden will have a negative impact of 2% on GDP growth in 2023. This puts more pressure on growth in the following years with growth forecasts 0.7% in 2024, [down from 1.4%] and 1% growth in 2025.
An ongoing crisis
Talk to MoneywebFrank Blackmore, lead economist at KPMG, said that while the permanent opening is on the cards, uncertainty lingers about how severe it will be over the years it has planned.
“Now, we’re at it [Stage] 4 … We will have a growth of 2%, now we have taken off two whole percentage points from that.
“Nationally, the broader impact on growth will be severe,” he said.
Blackmore further said that it would not match general wage growth this year and that productivity could pose risks to the economy.
“If that’s the case [wage negotiations] it’s more in line with productivity, so there’s not a lot of economic risk, but if it’s not in line with what’s happening on the productivity side, it’s going to be a second-round effect on inflation, and of course that means higher rates. longer, and less growth.”