South Africa has hit a new low, and things might get worse: The Reserve Bank

According to Rashad Cassim, deputy governor of the South African Reserve Bank, South Africa is presently suffering the lowest growth episode in its modern history, and the country’s development prospects might see living standards fall much worse (SARB).

The constable stated at a recent central banking conference in Cape Town (14 March) that the previous three years had been spectacular for the country’s economy, but for all the wrong reasons.

“Domestically, we are experiencing the lowest growth episode in modern South African history, marked most recently by the widespread failure of basic infrastructure – especially electricity.”

“Externally, we have been buffeted by a series of extraordinary shocks: the Covid-19 pandemic, the war in Ukraine, and a global inflation surge,” he said.

Cassim stated that the central bank expects growth rates of 0.3%, 0.7%, and 1.0% for the next three years, which is hardly a promising prognosis.

“These are disastrously low. Given population growth rates of around 1.2% annually, the implication is that living standards will continue to fall, as they have done on average since 2014,” he said.

According to Statistics South Africa, load shedding has had a substantial impact on the South African economy, resulting in a quarterly seasonally adjusted decline of 1.3% in Q4 2022.

This statistic was three times worse than the market consensus, which expected a 0.4% decline for the quarter.

Due to the continuing high-stage load shedding, this has sparked fears about a probable recession in South Africa, with analysts anticipating another quarter of drop in Q1 2023.

Cassim stated that growth estimates remain low due to the economy’s supply-side instability and the ongoing rolling blackouts.

“We know electricity shortages have intensified; we expect to have 250 days of load-shedding this year, from 157 days last year and 48 days in 2021.”

This is a harsher forecast than the Central Bank gave at its January Monetary Policy Committee (MPC) meeting, when it predicted 200 days of load shedding in 2023. On this premise, the SARB reduced its growth forecast for 2023 to a meagre 0.3%.

“On top of that, the freight rail system has, for the most part, not been functioning optimally, removing another pillar of the economy’s productive potential. There are many other constraints in the economy that also suppress potential growth.”

Cassim believes it is essential for the bank’s forecast staff to face the realities head on and reduce predictions.

Inflation is another issue that South Africa is dealing with. As of now, headline inflation is 6.9%, but core inflation is 4.9%.

The high point appears to have occurred in July of last year, when headline inflation reached 7.8%.

According to the central bank, despite continuous interest rate rises, inflation has been over the target range of 3-6% since May 2022.

The SARB now expects inflation to return to the midpoint of its target range by the end of the year. Similar forecasts have been made by the International Monetary Fund.

Cassim stated that these forecasts are only positive provided there are no additional economic shocks.

The Bureau of Economic Research (BER) has published inflation forecasts for 2023 that range from 5.9% to 5.6%, up from 5.3% in 2018.

Cassim emphasised that the country may face other shocks, to which the central bank would have to adapt.

“Food inflation has been coming in higher than expected, and it surprised us once again in the latest consumer price index (CPI) release from Stats South Africa.”

“There is a global dynamic to elevated food price inflation, but now we are also worrying about load-shedding driving up food prices, as electricity shortages start to disrupt the production and storage of food,” Cassim said.

Cassim also stated that the exchange rate outlook has lately deteriorated, despite the fact that the US economy is booming and markets are pricing in additional Fed rises, causing the rand to decline from roughly R17 per dollar in January 2023 to more than R18 recently.

In his closing remarks, Cassim stated that if inflation does not relax, interest rates will not fall into the targets established by the central bank, causing prices to rise.

“There are clear risks of adverse developments, which could require further monetary policy action to contain inflation.”

While the bank hopes for a soft landing, he says it is bracing for the worst.