PwC South Africa lowers growth expectations amid local and global headwinds


Business services and advisory firm PwC South Africa said its base case forecast real gross domestic product growth of 1.8% for the country this year, compared to its 2.5% estimate of GDP growth at the start of the year.

Economic growth faces a myriad of headwinds this year, including a weaker global environment weighing on export potential, a tightening of domestic monetary policy, a further increase in power outages and the negative impact of local and foreign factors on companies’ supply chains, in addition to other factors, the company said on May 30.

“This is not an isolated deterioration, with a general decline in economic momentum across the world. PwC’s global economic growth forecast for 2022 is now 1.3 percentage points lower than in January,” PwC said in its “May 2022 South Africa Economic Outlook” report.

PwC forecasts real economic growth of 3.7% in South Africa’s major trading partners this year, compared to a projection of 4.7% in January.

“South Africa’s major trading partners include some of the world’s largest economies, including China and the Eurozone. These economies are facing multiple headwinds, including rising interest rates, supply chain disruption, resurgence of Covid-19 waves, as well as producer and consumer inflation at the lowest levels. highest for decades,” said the chief economist of PwC South Africa. Lullu Krugel.

At the local level, the slowdown in economic growth will translate into reduced job creation. That, in turn, will likely push the unemployment rate to new highs, the company said.

Over the past three months, the main factors disrupting local import supply chains have been the Russian invasion of Ukraine, Covid-19 shutdowns in China, flooding in KwaZulu-Natal and increased load shedding.

“The pressures on the supply chain are now more intense than during the worst of the Covid-19 pandemic and the global financial crisis of 2008-2009. This is forcing companies to assess the resilience of their supply chains to continue to provide goods and services,” PwC said. Christie Viljoen, Senior Economist in South Africa.

Inflation remains at the upper end of the Reserve Bank of South Africa’s target range. Headline inflation was 5.7% year-on-year in January and February, and 5.9% year-on-year in March and April.

The weaker rand amplifies the impact of rising commodity prices on import costs and ultimately local inflation. The cost of imports increased significantly during the month of March. For example, the cost of fats and oils, a category including sunflower products, which is a key export from Ukraine, rose 9.4% month-on-month.

“While it will take some time for these higher prices to pass from the port to store shelves, we can already see the impact of fuel prices on transport costs. For example, the cost of public transport increased by 12.6% year-on-year in April, compared to 10% year-on-year in January before the Russian invasion of Ukraine,” PwC said in the report.

PwC expects inflation to average 6% this year before moderating to an average of 5% in 2023, which would be the highest two-year average since 2007 to 2008.

EXPORTS

The value of South African exports hit a record high in March of almost R170 billion, up 10% from the previous month and more than 30% from March a year earlier in due to rising international commodity prices.

Data from Statistics South Africa shows that prices received on South Africa’s coal exports increased by more than 20% in the first quarter of this year, and coal export volumes also increased by significantly, PwC said.

Historically, South Africa’s trade deficit has resulted in net exports, which is exports minus imports, which has weighed on gross domestic product. From 2017 to 2019, gross domestic product growth was on average 0.6 percentage points lower due to the negative impact of this deficit.

Similarly, in 2019, when overall gross domestic product growth was only 0.1%, net exports subtracted 1.1 percentage points from the growth figure.

In 2020, as the local economy stalled and imports fell by 12% in value, export earnings increased by 7%, with local miners and farmers benefiting from high domestic commodity prices. Net exports thus reduced the depth of the recession, which resulted in a 6.4% drop in real gross domestic product, by 1.7 percentage points.

More recently, net exports contributed 0.1 percentage point to economic growth in 2021.

While the positive impact of exports on the calculation of gross domestic product is often negated by the negative impact of imports, export earnings are an important contributor to the local economy, the company said.

“Our analysis shows that for every million rand spent in different industries to produce exported goods, the greatest employment multiplier impact comes from the export of goods related to agriculture and forestry, in particular vegetables, citrus fruits, furniture, wood and timber products and livestock,” PwC said.

The top ten exports by multiplier accounted for 7.6% of export revenue in 2021. This indicates that while exports play an important role in the local economy, the most influential export products from a Job creation represents only a small share of total export earnings, the company added.

“An increase in exports with a strong employment impact can make an important contribution to help solve the unemployment conundrum in South Africa. To achieve this, as in the case of agriculture, which produces high-impact products like vegetables, citrus fruits and livestock, some of the solutions are well known.

“In the case of state-controlled network industries, the sector requires improved reliability of electricity supply from state-owned Eskom, increased efficiency of port operations by Transnet National Ports Authority and services more reliable rail services by Transnet Freight Rail, in addition to other factors,” said PwC.

The list of conditions required to achieve export growth is relevant to many other export-oriented industries, including mining and forestry, and speaks to a broader set of challenges facing the South African economy. is confronted. The challenges aren’t insurmountable, however, and the solutions aren’t necessarily expensive, the company said in the report.

An example in PwC South Africa’s February 2022 Economic Outlook Report suggested that a revised regulatory framework could enable at least 450MW of a required 4,000MW increase in electricity generation capacity from South Africa. be available immediately, with an additional 4,000 MW brought online in the short to medium term.

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