OECD Economic Outlook, Volume 2023 Issue 1

South Africa

GDP growth is projected to slow to 0.3% in 2023 before picking up to 1% in 2024. Investment will become a much-needed driver of growth as the energy crisis requires additional power generation capacity. Higher interest rates and inflation are denting consumption, while electricity outages and lower global growth are weighing on exports. Investment will boost imports and, together with declines in the terms of trade, widen the current account deficit. Inflation will respond slowly to tighter monetary policy, with significant risks around the pace of this decline.

The energy crisis will slow the pace of fiscal consolidation as necessary public support to the sector results in additional expenditures. Falling commodity prices and slower growth will lower revenues. Broadening the income tax base and raising property and environmental taxes would help to offset this decline and improve equity. Monetary policy should stay the course to bring inflation down. The ongoing restructuring in the electricity market should be used to improve the quality of energy infrastructure and diversify energy sources, boosting productivity and resilience.

The outlook continues to deteriorate

GDP declined by 1.3% in the fourth quarter of 2022 as exports fell by 4.8%, constrained by chronic electricity outages and ongoing challenges in railway freight transport, such as frequent derailments, a shortage of locomotives, and cable theft. The terms of trade have declined due to lower export and higher import prices. Employment remains below pre-pandemic levels and real total earnings fell 2.6% in the year to December 2022, tempering earlier concerns of rising wage pressures. Nevertheless, annual headline and core inflation rose to 6.8% and 5.3% respectively in April, driven mostly by food and services inflation.

South Africa: Activity and fiscal indicators

Source: Economic Outlook 113 database; South African Reserve Bank; and OECD calculations.

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South Africa: Demand, output and prices

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Electricity cuts have been in effect on most days since September, and outages often amount to 4-8 hours a day. Between February and April, a national state of disaster was declared. Supply disruptions weigh heavily on exports and the current account, which moved to a deficit of 2.6% of GDP in the fourth quarter of 2022. Large external financing needs increase the exposure to higher financing costs and potential volatility in global financial markets.

Slowing fiscal consolidation is adding pressure on monetary policy

The government budget projects a narrowing headline deficit, to reach 3.9% in the 2023-24 fiscal year. However, part of the announced support package to the national power monopoly Eskom, amounting to 2.5% of GDP, was not included in this budget. In addition, falling commodity prices and slower growth will reduce tax revenues in the current fiscal year, while rising political pressures for more permanent income support through the “Social Distress Relief” grant and for higher public wages are likely to push up spending. The projected slower pace of fiscal consolidation than foreseen in the budget will add to inflationary pressures and financial vulnerabilities, putting a higher burden on monetary policy. The central bank raised the policy rate to 8.25% in May and is expected to maintain it at that level until mid‑2024, when inflation is projected to start falling slowly.

An unprecedented energy crisis holds back growth and fuels inflation

Regular electricity cuts will persist in 2023 and weigh on exports. Household spending will be limited by high inflation and tight financial conditions. After a weak patch in 2023, private investment, particularly in power generation, will become the main driver of growth over 2024. This should reduce the frequency of electricity cuts and relax constraints on growth by the end of 2024. Rising investment will push up imports, which together with a decline in the terms of trade and supply disruptions to exports, will weigh on the current account. Widespread electricity outages will continue to put pressure on a broad range of prices, despite weak growth. Inflation is expected to remain above the target midpoint of 4.5% during 2023 but fall back into the target range of 3-6% in 2024 as the delayed effects of monetary policy are felt. The recent weakening of the currency points to upside inflation risks. Electricity cuts and reduced activity from SMEs could lead to vulnerabilities in the corporate sector, exposing domestic banks. On the upside, additional investment in electricity generation could alleviate supply constraints more rapidly than expected.

Promoting competition in network sectors would improve living standards

Reducing supply bottlenecks through investments in the electricity sector should be the priority. Lowering the regulatory burden and entry barriers in network sectors, namely rail and energy, would increase supply, foster competition, boost private investment in high-quality infrastructure, improve the quality of services and lower consumer prices. Beyond the positive impact on productivity and growth, lower prices for network services would benefit low-income households the most, helping to curb inequality and poverty. Limiting power outages would also increase the personal safety and security of women, increasing incentives for female labour force participation, and helping to reduce the incidence of gender‑based violence. Better access to childcare facilities would improve women’s access to economic opportunities.