South Africa the biggest loser among major economies

The International Monetary Fund (IMF)’s April update to the World Economic Outlook has trimmed the global growth prospects for the year – including a sizeable slice off South Africa’s GDP forecast.

As announced in March, the IMF has cut South Africa’s GDP growth outlook to a paltry 0.1% for 2023, showing that the country is flirting with a full-year recession.

However, more damning is the fact that South Africa is the biggest loser among all major global economies detailed in the IMF’s report, having its GDP outlook shaved by 1.1 percentage points from the January report.

The only other major economy to come close to this is Japan, which the IMF forecasts will see a 0.5 percentage point reduction in its GDP rate to 1.1% in 2023.

The IMF’s projection for economic growth in South Africa is currently the most pessimistic of the financial groups that have published annual forecasts, sitting alongside Nedbank’s estimate of 0.1%.

While none of the major banks in South Africa or abroad have yet to pencil in negative growth for South Africa for the full year, it isn’t easy to find anyone looking beyond the 0.0%-0.5% range.

The South African Reserve Bank was the first to pull the trigger on the bleaker outlook in 2023, cutting its forecast to 0.3% at its January meeting, later revising it to 0.2% in March.

The 2023 budget from National Treasury is pointing to a rosy 0.9% GDP growth this year.

South Africa’s dismal economic outlook comes down to the pervasive energy crisis, which has cemented load shedding as a daily feature in life in the country.

According to the Reserve Bank, load shedding remains the key risk to the economy, threatening to lift costs across the board for South Africans. The central bank said that load shedding has wiped two percentage points of growth from the map for 2023.

The bank’s estimate of 0.2% growth is based on 250 days of load shedding expected for the year. As of Wednesday (12 April), the country has already experienced 101 days of load shedding, with worse still expected to come.

According to the IMF, South Africa’s growth outlook is expected to recover over the medium term, but South Africans at large are still likely to become poorer over time.

“The near-term growth outlook has deteriorated. Real GDP growth is projected to decelerate sharply to 0.1% in 2023 mainly due to a significant increase in the intensity of power cuts, as well as the weaker commodity prices and external environment,” it said.

“In the medium term, growth is expected to rebound, though only to about 1.5% per year, with income per capita likely to stagnate as a result.

“This is because of long-standing structural impediments, such as product and labour market rigidities and human capital constraints, offsetting expected improvements in energy supply, higher private spending on energy-related infrastructure, and a more supportive external environment,” it said.

The country’s growth prospects also face a host of risks, both internally and externally.

Externally, downside risks include a deeper and more protracted global slowdown, further weakening of commodity prices, and a shift in global investors’ sentiment away from emerging markets.

Domestically, however, downside risks include delays in addressing the energy crisis and Eskom’s and Transnet’s operational and financial weaknesses, slower-than-expected progress or reversal in reforms and policies, including fiscal consolidation, and increased political uncertainty.

“On the upside, decisive implementation of structural reforms combined with fiscal consolidation would help boost private investment, and ultimately employment and growth over the medium term. Similarly, stronger-than-expected private sector participation in the energy sector could improve the growth outlook,” it said.

Global growth outlook

The IMF trimmed its global-growth projections, warning of high uncertainty and risks as financial-sector stress adds to pressures emanating from tighter monetary policy and Russia’s invasion of Ukraine.

Gross domestic product will likely expand 2.8% this year and 3% next year, each 0.1 percentage point less than forecast in January, the fund said Tuesday in a quarterly update to its World Economic Outlook. That compares with a 3.4% expansion in 2022.

The unexpected failures last month of Silicon Valley Bank and Signature Bank and the collapse of Credit Suisse Group AG roiled markets and ignited financial-stability concerns, complicating central banks’ quest to tame inflation while maintaining growth and the health of the banking system.

“The risks are weighted heavily to the downside, in large part because of the financial turmoil of the last month and a half,” said Pierre-Olivier Gourinchas, the fund’s chief economist. “That is under control as of now, but we are concerned that this could result in a sharper and a more elevated downturn if financial conditions were to worsen significantly.”

Speaking at a briefing Tuesday, Gourinchas said “there are maybe some lurking vulnerabilities and this is why it’s very important at this point for financial supervisors, regulators and authorities to really go and look very carefully at these pockets of vulnerability that might still exist, whether in the banking sector in the non-bank financial institutions, and more broadly.”

In a Bloomberg Television interview, he said banks “are going to be a little bit more prudent in extending loans going forward. And that could weigh down further on economic growth both in the US and in the rest of the world.”

While the reduction in the 2023 forecast isn’t large, the report showed the IMF is more subdued about the outlook than in January, when it saw this year as a “turning point” for the global economy and risks were more balanced.

Last week, the IMF warned growth over the next five years will be limited. That’s based on risks from economic fragmentation caused by geopolitical tension — including the escalating US-China rivalry that’s reinforced by the war in Europe — as well as slower labour-force growth and decelerating long-term rates of expansion in China and South Korea.

With Bloomberg

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