Frank Blackmore, Lead economist at KPMG

Commodities help South Africa deal with global headwinds:

Summary paragraphs:

- Economic growth back to pre-pandemic levels

- Inflation to peak in 2022 and then return to midpoint of South Africa’s inflation target range

- Current account surplus continues as global growth expectations moderate

Table 1: KPMG forecasts for South Africa

Years 2021 – 2023 (please provide chart/ data in excel)

Source(s): Statistics South Africa, KPMG analysis

Main text (500 to 650 words overall):

Callout – Context, real GDP growth and unemployment

• South Africa is returning to pre-Covid-19 levels of economic growth and is currently facing the inflationary implications that arose as a direct consequence of the Covid-19 pandemic and the Russian invasion of the Ukraine.   Interest rates are rising and, and as with the rest of the world, growth prospects are being reduced accordingly. 
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• The South African policy rate has increased from a low of 3.5% in Q3 2021 to a current level of 5.5% and the consensus forecast is for a further increase of around 1 percentage point by the end of 2022.  These increases would leave the policy rate at the level recorded prior to the onset of the Covid-19 pandemic and have led to a reduction in potential growth level attainable over the near term.
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• Even though increasing interest rates have resulted in slowing growth prospects, the main contributor in this regard remains the insufficient and inconsistent supply of electricity by South Africa’s energy supplier Eskom, with over half of all business days in the second quarter of 2022 experiencing some degree of load shedding or electricity supply restriction. This barrier to growth has been recognized by government who, in July, announced the scrapping of license requirements for private power generators in a sweeping overhaul of the South African energy industry.  However, given the lags associated with implementing large scale energy projects, it will take some time before the effects of these policy changes are realised.
• South Africa remains in a unique position where many of its natural resource exports mirror those of Russia[1] and consequently has profited from the rise in commodity prices caused initially by both Covid-19 as well as the conflict in Ukraine.  The result of the increase in commodity prices has been an improvement in South Africa’s terms of trade which has led to surpluses on its current account since 2020. 
• GDP is set to grow by around 1.8% in 2022 led by contributions from the finance, real estate and business services sector, growth in personal services as well as mining, agriculture and trade, catering and accommodation.
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• The projected growth in 2022 is noticeably lower than that achieved in 2021. It should however be understood that much of that growth was due to technical base effects following the sharp Covid-19 induced contraction experienced in 2020.
• Growth in 2023 is estimated to decline further to 1.5% with higher interest rates and lower global growth reducing aggregate demand locally. In 2024 economic growth should converge back to the average pre-Covid-19 level of around 1.7% as inflationary pressures abate and global grow rates improve. 
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• Little tangible policy action has been taken to increase the lower investment and consumption spending caused by a reaction to a number of governance failures including ongoing policy uncertainty, corruption, aging infrastructure and continued power shortages, the absence of growth-stimulating policy interventions and inadequate levels of service delivery.  More will need to be done to lift the South African growth trajectory above its current long-term level.
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• The predicted rate of economic growth over the 2022 to 2024 period would not be sufficient to reduce the high unemployment rate forecast at 34.3% for 2022. South Africa is to remain in a paradoxical state of a growth recession, where slow growth is accompanied by rising unemployment unless some of the barriers to growth listed above are explicitly addressed. 

Callout - Inflation

• Global inflationary pressure continues to weigh on the economy and remains largely cost push in nature as aggregate demand still lags below its potential level.  The main drivers of forecast consumer inflation remain energy prices, including both fuel and electricity prices, as well as food prices caused by ongoing supply chain disruptions following the Covid-19 pandemic and exacerbated by the Russian conflict in the Ukraine. 
• Although the global increase in commodity prices has slowed somewhat on lower growth expectations, South Africa still faces elevated fuel and food production costs. Energy supply and in particular electricity, remain an ongoing concern for South Africa whose energy regulator awarded the state-owned utility an above inflation 9.6% increase in energy prices from 1 April 2022. 
• The positive balance on the current account resulting from elevated commodity exports, although being supportive of the rand, is not large enough to shield South Africa from the strengthening US dollar and these inflationary increases.
• Headline consumer inflation rate is expected to reach well above the upper boundary of the central bank’s inflation targeting range of 3% to 6% at around 7.3% in 2022 before moving back towards the upper bound of 6% in 2023 and further to the midpoint of the targeting range in 2024.

Chart 1: Current Account Balance

Source(s): Statistics South Africa, South African Reserve Bank, KPMG analysis

Chart 2: Consumer Price Inflation

Source(s): Statistics South Africa, KPMG analysis