The latest GDP data shows an economy that has been mired in deep stagnation for more than a decade, was severely hit by the pandemic and has experienced an exceedingly weak recovery since then.
In rand terms, real GDP in the fourth quarter of 2023 reached R1.158-trillion — much the same as its pre-Covid peak of R1.150-trillion at the start of 2020. In other words, the economy is still roughly the same size as it was four years ago. Economic activity is still below pre-pandemic levels in six out of 10 sectors.
“Flatlining” would be a good word to describe this performance, which has been one of the weakest among all emerging-market (EM) economies since the pandemic.
Minister in the presidency Khumbudzo Ntshavheni put a different spin on it in a press statement, gushing that the data signified economic “resilience” and the “positive impact of government interventions”. She even saw the 0.1% quarterly growth rate as evidence that the economy has reached “a positive turning point”.
Electricity minister Kgosientsho Ramokgopa added to the good vibes last week by asserting that there will be no need for his ministry by the end of the year, given the expectation of a significant reduction in load-shedding as more power comes on stream.
The consensus is that, because of the better prognosis for energy supply, an easing of bottlenecks at the harbours and expectations of better freight rail performance due to greater private participation, the country’s growth rate could double from 2023’s dismal 0.6% to about 1.2% in the year ahead.
However, given the population growth rate of 1.8%, this means that the average standard of living will still keep dropping. (South Africa’s real per capita GDP has been declining since 2014.)
Most economists believe the country needs to grow in the 3%-4% range to address the brewing fiscal crisis and make significant inroads into unemployment. The idea that this can be achieved just by ending load-shedding and the logistics crisis — and that we are close to realising these goals — understates the country’s predicament and the forces that have been constraining its growth for the past 15 years.
“It’s very hard to see the tunnel, let alone the light at the end of it,” Ann Bernstein, executive director of the Centre for Development & Enterprise, said at Daily Maverick’s The Gathering Twenty Twenty Four conference last week.
“We have to be honest and accurate about why South Africa is in this situation,” she told delegates, because “if you dismiss the causes of South Africa’s crisis, you’re going to get the solutions wrong”.
The truth, she said, is that “we are in deep, deep trouble”. South Africa is deindustrialising, its unemployment level is among the highest in the world, 50%-60% of the population is in poverty and the economy is attracting very little new investment.
For Business Leadership South Africa CEO Busi Mavuso, the GDP figures were “a very loud clarion call” to action.
“The people of South Africa are becoming poorer and their legitimate aspirations to be able to work, generate incomes and take care of their families are being frustrated,” she wrote in her weekly newsletter.
While appreciating that the government and business are together making progress in addressing the energy and logistics crises, she flagged two major emerging constraints: the supply of water and of industrial gas.
“We cannot find ourselves in a situation where we have resolved the energy and logistics crises only to be confronted with a new crisis that ultimately means economic activity doesn’t happen,” she wrote.
“The national effort needs to focus on what matters: economic activity.”
The economy has flatlined since 2020 and will keep underperforming unless the structural constraints that raise the cost of doing business and deter investment are overcome
— What it means:
Days after South Africa’s GDP data was released, independent London-based economic research company Capital Economics published its global GDP ranking, with estimates for up to 2050.
Heading the surge up the ranking is India, which is expected to grow by about 4%-5% a year, allowing it to overtake Japan and Germany to become the world’s third-largest economy as early as 2026.
By contrast, South Africa’s real GDP growth is expected to average only about 2%, causing it to fall from 36th to 39th position by 2050.
The big movers up the league table will mostly be those EMs with rapid population growth and the potential to develop manufacturing hubs or that stand to benefit from the green transition.
So, for instance, Nigeria, Uganda, Kenya and Tanzania are expected to jump five to 10 places up the table, while Ethiopia could rise by almost 30 places, into the top 25, as these countries’ working-age populations are likely to expand rapidly, supporting strong economic growth.
The second group of fast movers includes countries with large, or potentially large, manufacturing sectors. This is because manufacturing tends to allow countries to absorb technology and know-how from more developed economies, resulting in greater productivity gains and, in turn, faster GDP growth.
The EMs with the best long-run growth prospects are those that stand to benefit from demographic tailwinds and a growing manufacturing sector — like Vietnam, the Philippines and India.
A third, smaller group of EMs, those that sit on the primary stocks of raw materials needed for the green transition such as copper and nickel (like Chile and Indonesia), and those well placed to produce clean energy (Morocco), are also expected to do well.
So why does Capital Economics expect South Africa to slip down the ranking? The country has a young population and the most developed manufacturing sector in Sub-Saharan Africa, and, with abundant sunshine, is well placed to build on its burgeoning renewable energy sector.
Capital Economics Africa economist David Omojomolo says the consultancy is downbeat about South Africa’s prospects mainly because its growth constraints are deeply structural while the economic reforms required are politically unpopular. These limitations will, therefore, be very difficult to overcome.
And while South Africa does have a young population, it has among the lowest fertility rates on the continent, so will get less of a growth boost from its demographic dividend than many of its neighbours.
“South Africa’s economy has one of the weakest growth records of any emerging market over the past decade, and its post-pandemic recovery has been particularly disappointing,” says Capital Economics in a recent research note.
“At the heart of the problem are major structural impediments to growth that stretch far beyond the most current pressing issue of the day, load-shedding.
The main cause of South Africa’s low potential GDP growth, the company believes, is that productivity growth has weakened substantially since the global financial crisis. It identifies three main reasons for this.”
The people of South Africa are becoming poorer and their legitimate aspirations to be able to work, generate incomes and take care of their families are being frustrated
— Busi Mavuso
First, South Africa has a human capital problem, in that it generally achieves very low rates of educational attainment. This has led to mismatches in the labour force, where much of the demand has been for higher-skilled workers. The upshot is simultaneously a skills shortage and a high structural rate of unemployment, both of which place a cap on the country’s growth potential.
Second, large parts of the economy, particularly the network industries of energy and transport, are overregulated and dominated by state-owned entities (SOEs). This stifles competition, introduces inefficiencies and raises costs for downstream businesses.
To compound matters, import tariffs are relatively high in comparison with other large EMs. This limits the competition facing many dominant South African firms, reducing their incentive to make efficiency gains and raise productivity while raising costs to the consumers of their goods and services.
The final factor is a low investment rate. South Africa’s investment ratio has been on a downward trend since 2013 and, at about 14% of GDP, is now one of the lowest of any EM. (Countries that have sustained rapid growth have tended to boast investment ratios of 25% or higher.)
“Many reasons have been put forward to explain [South Africa’s] low investment, including a steady deterioration in the business environment as well as crime and corruption,” says Capital Economics. “But at the root of the problem is a low domestic savings rate, which limits the pool of domestic resources for investment.”
The consultancy acknowledges that while some reforms are under way, many of the required changes — such as tackling powerful teachers’ unions, rationalising consumption spending and reducing the role of SOEs — are politically unpopular or challenge vested interests.
In addition, Omojomolo says, “the challenges of corruption and ineffective policymaking are likely to delay or stop outright the reforms the economy needs for growth to pick up”.
This view is shared by many local economists, at least over the medium term. Even the National Treasury expects the country’s growth to average only 1.6% over the next three years.
But to extrapolate South Africa’s current stagnation blandly out to 2050 requires a distinct failure of imagination.
The country’s performance could be either much worse or much better than that implied by its 39th position. For it to be much better, the first step is to resist the airbrushing by Ntshavheni and Ramokgopa. Because if South Africa can’t even admit to the severity of its condition, it can’t possibly hope to fix it.
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