Published on Africa Can End Poverty

Amid a lot of uncertainty, lies an opportunity to build the South African economy back better

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Like many, the COVID-19 pandemic has severely disrupted our personal lives. As economists, it has also challenged our ability to forecast economic variables. As we prepared for our recently published 13th South Africa Economic Update, developments in the COVID-19 (coronavirus) pandemic—in the country and worldwide—led us to revisit our outlook for South Africa’s key economic variables many times. The current global outlook is looking better after last year’s collapse and in this Economic Update, we show that South Africa is positioned to grow at the fastest pace in over a decade, bouncing back from last year’s 7% growth contraction.

In this Update, we project economic growth to rebound to 4.0% in 2021. However, there is considerable uncertainty around this forecast. At the beginning of the year, just out of a summer break that did not bring us the joyful family reunions we were longing for; and as South Africa was battling its second wave of COVID-19 infections, the prospect for an economic rebound in 2021 appeared limited. A few months later – high commodity prices, sustained external demand, and higher domestic output and sales on the back of activity normalization, seemed to promise a stronger recovery. Last month, as COVID-19 infections spiked and we isolated again, uncertainties about the duration and severity of this third wave raised questions about economic growth this year again. Just as we launched this Update, social unrest and looting that resulted in destruction of businesses cast another shadow on economic prospects.

The unusual level of uncertainty and volatility in the economic cycle makes it hard to project short-term developments. However, what is at stake now is not growth this year, it is growth over the next 10 years and beyond. Previous work by the World Bank has argued that South Africa’s growth problems before the pandemic were structural and long-standing  (see for example the Systematic Country Diagnostic published in 2018). The 2010s low growth decade translated in weak progress in improving living standards for South Africans compared to other emerging countries (figure 1). The events over the last few weeks have reminded us how urgent it is to create the conditions for higher and more inclusive growth that benefit all South Africans. However, without significant policy action, constraints such as electricity shortages, and transport and logistical costs and bottlenecks will almost certainly continue to weigh on private investment and economic activity. We project that economic growth would return to around 1.5% by 2023, which would not be enough to improve economic and social outcomes following the pandemic.

Figure 1. South Africa is falling behind its peers

GDP per capita 1999-2020

GDP per capita 1999-2020

As the COVID-19 crisis compounds socio-economic challenges, while managing the pandemic,  it is critical not to lose sight of actions that can improve the potential of the domestic economy.  The reforms needed to unlock South Africa’s growth are well known. They have also been recognized by the government. Recent announcements to address some of them (SAA, electricity generation, ports) are very important steps. Such reforms are needed to restart private sector investment, create more jobs for the growing working-age population, and take advantage of the global recovery. Structural reforms usually take time to bear fruit, but their signaling effect can boost confidence and private sector investment immediately. 

On the fiscal side, the higher-than-expected revenue last year – and the possibility that it happens again this year – should not distract us. Reforms are needed for fiscal policy to play a more countercyclical role and have a bigger impact on economic and social outcomes while supporting macroeconomic stability . Some relaxation of the constraints in the short term should not translate into long-term commitments that will become a problem when the cycle enters a different phase. Resources still must go where they can have the highest developmental impact and be spent efficiently. Rebuilding fiscal space is critical to maintain the government’s ability to respond to shocks in the future.

At the moment, the favorable global environment presents an opportunity for the government to take important decisions and make difficult policy choices in a situation where the global recovery supports South Africa’s growth . This can help smooth the adjustment needed and, combined with reforms, increase confidence in the country’s outlook. At a time when the COVID-19 risks are heightened again, it will be important to take advantage of this opportunity and set the conditions for high and inclusive growth after the pandemic.

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