OECD Economic Outlook, Volume 2020 Issue 2

South Africa

An early and long lockdown to tackle the virus outbreak led to a significant decrease in economic activity in the first half of 2020. A substantial rebound is expected in the second half of the year, driven by high demand and favourable prices for South Africa’s exports. Near-term growth will nevertheless be modest owing to subdued domestic demand. Household consumption will remain low as unemployment will remain high. Private investment will be restrained by a lack of confidence. GDP is set to contract by 8.1% in 2020 before increasing by 3.1% in 2021 and 2.5% in 2022.

Inflation will remain below the Reserve Bank’s target, allowing monetary authorities to reduce policy rates further. In the event of another large virus outbreak in the near term, fiscal policy has reduced space to react. Fiscal consolidation is needed when the pandemic subsides to limit public debt growth. Recent steps in launching the auction of telecom spectrum and procuring renewable energy from independent power producers are sending positive signals to business leaders and could lift confidence if successfully concluded. Advancing structural reforms in network sectors, restructuring state-owned enterprises and boosting infrastructure investment could restore growth momentum.

The outbreak receded after a long lockdown

After the lifting of the lockdown in June, infections increased rapidly in July and August, but since mid‑September the spread of the COVID-19 virus has receded, thanks to the strategy of massive testing and targeted restrictive measures. Consequently, the government lowered the alert level of the state of disaster, and partially reopened borders to travellers as of 1 October. Still, a curfew and some restrictions on gatherings, liquor sales, sports activities and entertainment remain in place.

South Africa: Economic activity and confidence

1. Seven-day moving average.

Source: OECD Economic Outlook 108 database; OECD calculations based on European Centre for Disease Prevention and Control; and Bureau for Economic Research, South Africa.

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South Africa: Demand, output and prices

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Economic activity picked up after the lockdown

Economic activity collapsed in the second quarter of 2020, with all sectors but agriculture registering a large fall in output. A progressive recovery started in July. Exports, mining and manufacturing rebounded strongly in the third quarter according to monthly indicators. In addition, household consumption has picked up, aided by additional government transfers to social grant recipients and wage replacement payments for workers (amounting to ZAR 51 billion, around 1% of GDP, since April). The recreation, entertainment and tourism sectors remain the most affected. In total, 2.2 million workers lost their jobs in the second quarter, while the number of discouraged workers increased by 5.6 million.

Monetary and fiscal policies are supportive

Since the beginning of the crisis, the Reserve Bank has cut the repurchasing rate from 6.25% in early March to 3.5% and provided liquidity to the banking sector. Prudential regulations were eased to help financial institutions to cope with the consequences of the crisis. On the fiscal side, the government has put in place a rescue plan amounting to 10% of GDP to support households and businesses. The initial increase in social grant amounts has been prolonged as long as the state of national disaster continues. In October, the government released a reconstruction and recovery plan aiming to mobilise ZAR 100 billion (around 2% of GDP) for infrastructure investment next year. This plan also includes an ambitious employment stimulus programme to support job creation in the public and social sectors.

The rebound following the lockdown may not last

A strong recovery is estimated to have taken place in the third quarter of 2020, almost offsetting the slump in the second quarter. Most of the recovery next year will come from the external sector as exports will be boosted by higher commodity prices and demand. In addition, the government support programme will continue helping to maintain household consumption in the short run. Investment, however, is not projected to pick up strongly next year, as business confidence will remain low.

A failure to stabilise public debt could trigger financial market turbulence and adversely affect foreign capital inflows to which South Africa is highly dependent. Disruptions to trade linked to the COVID‑19 virus and persistently weak global demand could harm growth prospects. On the other hand, stronger growth in partner countries driven by a rapid vaccine distribution would lift growth.

Implementation of reforms is key to boost the economy

Targeted financial support to households and firms still affected by low activity should be continued, notably for the entertainment and tourism sectors. However, bold fiscal measures are necessary to curb public debt increases. Freezing public service wages and restructuring state-owned enterprises would limit government spending increases. Broadening competition in the economy, particularly in network industries and the transport sector, can boost the potential of the economy. Bolder implementation of government economic reform announcements is needed to lift confidence of households and businesses.