2022 is a year of reactions and normalisation from Covid-19, while the global economy will be slowing down significantly more than previously thought. At the same time global inflation has reached multi-decades high.
Even with slow growth, central banks are having to raise interest rates to control inflation. Russia and Ukraine are on a stand-off with each other, which is appending energy markets. Climate change and ESG are becoming top of mind for investors, but South Africa must think about immediate energy-binding constraints.
These developments will have negative impacts on the South African economy, the 2022 budget, and ordinary South Africans, according to Isaah Mhlanga, executive chief economist at Alexander Forbes Investments.
“South Africa is still a very small open economy that is impacted by what happens globally, therefore global developments matter,” he says.
The Omicron variant of Covid-19 is still prevalent in the US, China, and parts of Europe, which will impact global growth, Mhlanga predicts. The variant continues to affect supply chain constraints and global trade and will keep inflation elevated.
The emergence of the variant caused shock, which reinforces uncertainty on the global economic recovery. Global growth is expected to moderate to 4,4% this year, and current medium-term expectations put the South African economy into sub-2% growth.
Meanwhile, persistent inflation is pushing central banks to speed up withdrawal of quantitative easing and interest rate hikes, which will raise volatility in markets, and trigger portfolio outflows from emerging markets.
China’s slowing economic growth shifts policy to a formal easing stance. It will offset some of the weakness from slow growth in advanced economies, which will help support emerging markets growth.
Commodity prices are switching from tailwinds to headwinds for emerging markets but because China is reflating that moderation might not be as aggressive as previously thought, which is supportive of South Africa’s growth prospects.
Mhlanga says we can expect National Treasury to revise up tax collection when the budget is published next week on the back of better-than-expected tax revenues.
South Africa’s economic growth is expected to moderate into sub-2% over the medium term, while risks to the upside and monetary policy are expected to continue normalising.
Mhlanga expects an additional tax revenue of between R160-billion to R180-billion relative to the 2021 budget, which will reduce the risks of wage settlements and social relief grant extension. The budget will likely be more positive than the 2021 MTBPS.
He adds that it’s a year of two halves for markets: rising volatility and moderating returns followed by growth concerns and central banks backtracking by Q4 2022.
Mhlanga looked at the unemployment rate under various economic growth scenarios in South Africa and determined that the country requires economic growth of 4% to meaningfully reduce unemployment, and 5% to reduce inequality.
This means the National Development Plan growth target of 5% needs to be revived and be accompanied by the implementation of bold reforms.