2022 is a year of reactions and normalisation from Covid-19.
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 must 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.
Isaah Mhlanga, executive chief economist at Alexander Forbes Investments, says: “South Africa is still a very small open economy that is impacted by what happens globally, therefore global developments matter.”
Omicron variant
Shock 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.
The Omicron variant is still prevalent in the US, China, and parts of Europe, which will impact global growth. The variant continues to affect supply chain constraints and global trade and will keep inflation elevated.
Quantitative easing
Persistent inflation pushes 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 switch 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.
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.
South African inflation risks to the upside and monetary policy is expected to continue normalising.
Mhlanga expects an additional tax revenue of between R160 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.
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 says that Alexander Forbes sits right in the centre of the South African economy as whenever jobs are created, or lost Alexander Forbes can see it through pension fund administration and contributions. He 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.
The National Development Plan growth target of 5% needs to be revived and be accompanied by the implementation of bold reforms.
ENDS