Medium-term Budget: Economic growth prospects remain bleak

Finance Minister Enoch Godongwana tabled his maiden medium-term budget policy statement on Thursday, which made clear that long-term economic growth expectations remained bleak since the advent of the Covid-19 pandemic.

The combination of inadequate electricity supply and the effects of the pandemic on employment is expected to continue to limit the speed of economic recovery and growth.  

“There is profound uncertainty about the durability of the economic recovery, mainly due to renewed volatility in global conditions and the risk of renewed Eskom power cuts,” the treasury document read.

The state-owned power utility has implemented rolling blackouts for the past two weeks and ramped this up to stage 4 load-shedding on Monday, throttling 4 000 megawatts of capacity to avoid overwhelming the grid. 

On Thursday, the treasury said the risk of power cuts remained high and the only way to reduce pressure on the grid, support higher investment and lower the risk of load-shedding from late 2022 was by raising the licensing threshold for embedded generation. But, even with this, inadequate electricity supply would remain a binding constraint on economic recovery in the near term. 

The treasury projected real economic growth of 5.1% for 2021 — coming off a low base after contracting by 6.4% in 2020 — and 1.8% in 2022, compared with 2021 February budget review estimates of 3.3% and 2.2% respectively. Real GDP growth is expected to moderate to 1.6% in 2023 before ticking up to 1.7% in 2024. 

South Africa’s real GDP, although improved on the back of export commodity prices, has not returned to pre-pandemic levels. 

The treasury predicts GDP growth will contract in the third quarter of 2021 because the manufacturing, retail and hospitality sectors were hard hit by the combined blows of a third Covid-19 wave and the July unrest in KwaZulu-Natal and parts of Gauteng.

“Despite this, GDP is now expected to return to pre-pandemic levels late in 2022 — earlier than projected in the February budget review,” the treasury said. “This is supported by the 7.5% gross domestic product growth in the first half of 2021.” 

Households will experience a reprieve from the fallout of Covid-19; household consumption is projected to grow by 5.7% in 2021, boosted by improved earnings and growing credit extension  linked to low interest rates. But household consumption remains below pre-pandemic levels because consumers are spending less on semi-durable goods such as clothing. 

The reinstatement and extension of the Covid-19 social relief of distress grant until the end of the financial year in March 2022 is expected to boost spending for lower income households, the group where more than three-quarters of post-pandemic job losses have been recorded, said the treasury. 

Inflation is projected to reach 4.5% in 2021 and beyond that is expected to remain contained within the South African Reserve Bank’s target range of 3-6% despite upward pressure from food and energy prices. 

South Africa’s deepening unemployment crisis worsened as a result of the Covid-19 pandemic, and the jobless rate currently sits at a record high of 34.4% or 7.8 million unemployed  people, according to Statistics South Africa’s quarterly labour-force survey

The treasury said public sector employment gains in the second quarter of 2021 appeared to be driving a potential recovery in jobs, consisting largely of temporary work and training opportunities created through public employment programmes. 

“Sustainable reductions in employment will require the effective implementation of the economic recovery plan to crowd in investment and support job creation by the private sector,” said the treasury. 

It said the government would continue to consider measures to support employment growth but joblessness could not be solved by fiscal resources; it requires strong and sustained economic growth.

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Anathi Madubela
Anathi Madubela is a business journalist with a keen interest in the retail sector.

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