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07 Oct 2013

South Africa’s slow growth

David Faulkner

by David Faulkner

Economist, South Africa, HSBC

South Africa faces a challenging period of sluggish growth. After a shallow recovery in 2011 when GDP expanded by 3.5 per cent, economic activity slowed in 2012 and stagnated at 2 per cent in the first half of 2013. We have cut our GDP forecasts to 2 per cent in 2013 and 2.7 per cent in 2014.

The recovery has been frustratingly slow, relative to both history and other emerging markets, as a result of global headwinds and domestic constraints that include electricity shortages, worker unrest, production stoppages, high unemployment and rising labour costs.

Household consumption – three-fifths of the economy – has decelerated markedly since mid-2012 as gains in disposable income slowed amid weak employment growth and rising inflation. Consumer confidence has fallen to a decade-low and credit growth is moderating.

We have pared our projections for household consumption growth in 2014 from 3.6 per cent to 3 per cent.

The recovery has been frustratingly slow, relative to both history and other emerging markets

Fixed-capital investment grew robustly in 2011 and 2012 but the private-sector remains sluggish while public-sector investment effectively disappeared in 2013, despite the government’s emphasis on infrastructure spending as a lever for growth.

Much of the recent slowdown reflects falling investment in the electricity sector as industrial disputes, stoppages and delays impacted construction at Medupi, a coal-fired power station of 4.8GW – more than 10 per cent of current electricity capacity.

Delays in Medupi’s construction represent one of the most important risks to near-term domestic growth. Since 2008 South Africa has run an extremely tight supply demand balance on electricity that results in periodic power shortages: this limits the country’s growth potential and could account for private-sector fixed-capital formation being so slow.

Job creation in the private sector has stalled. High wage settlements discourage hiring and unrest plus lower output has caused job losses in the mining sector. Low skills levels are a further factor. Unemployment increased to 4.7 million in mid-2013, or 25.7 per cent, but a further 2.2 million are discouraged – wanting to work but not actively seeking employment because of lack of jobs or lack of hope. Youth unemployment, now above 50 per cent, is arguably the country’s most pressing socio-economic challenge.

With the South African economy facing prolonged sluggish growth, its twin deficits leave it susceptible to macroeconomic shocks and volatility. Weaker revenue growth is expected to widen the budget deficit while general elections in April 2014 may mean pressures for vote-grabbing expenditure increases.

However, weak growth will result in a large and persistent negative output gap, helping offset inflationary pressures feeding through from the currency depreciation – petrol prices have risen 23 per cent in a year – and high wage settlements. So, on balance, the absence of demand pressures should keep inflation within target for 2014.

South Africa is one of five countries impacted most by the prospect of the US Federal Reserve tapering asset purchases, alongside Brazil, India, Indonesia and Turkey. All are suffering from slower growth, weak currencies and macroeconomic imbalances, but South Africa has not hiked interest rates. We believe rates will remain unchanged until 2015 because relatively contained core inflation and downside risks to growth preclude policy tightening.

South Africa’s grinding recovery highlights the myriad of structural factors that impede near-term productivity gains and economic growth. The National Development Plan adopted during 2012 prioritises education, job creation and an efficient and capable state. However, implementation appears slow and uneven.

But the picture beyond 2014 is more optimistic. The release of an energy constraint that has hobbled growth prospects since 2008, the potential for natural gas exploration, dedicated investment in transport networks for exports, and a more favourable global environment with robust growth across major trading partners, should all help support a higher rate of potential growth in the medium term.

This research was first published on 1 October 2013.
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