Published on Africa Can End Poverty

Will South Africa turn the corner in 2017?

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Photo By: David Stanley/Flickr

The year 2016 was difficult for many countries. We estimate that global economic growth slowed from 2.7% in 2015 to 2.3% in 2016. High-income economies struggled with subdued growth and low inflation amidst increased uncertainty about policy direction in light of rising populism. Among emerging markets and developing economies, commodity exporters were most affected by the end of the commodity price boom, growing by only 0.3%—much in line with our estimate of 0.4% growth for South Africa, the lowest growth rate since the 2009 recession after the global financial crisis. By contrast, commodity importers carried the torch of global growth in 2016, expanding by 5.6%.

For South Africa, 2017 may mark a turning point. Based on our 9th South Africa Economic Update (SAEU), we expect growth to strengthen to 1.1% in 2017. A modest recovery in commodity prices is one reason for this, in addition to the markedly improved supply of electricity and smoother labor relations. We also expect inflation to decelerate in 2017, not least as the effects of the 2015/6 drought slowly begin to dissipate, reducing pressure on food prices. This is good news for households, and poor households in particular as food is their largest expense. Lower inflation limits the erosion of household budgets, and we expect private consumption to pick up again—potentially further supported by a recovery of the credit cycle. Finally, the rand continues to trade at relatively weak levels. While this makes imports more expensive—and holidays abroad less affordable for South Africans—it presents an opportunity for South African businesses: we expect exports to benefit from the weak rand and also see potential for more domestic goods pricing out imports in South African markets. 

Yet South Africa turning the corner in 2017 should not be taken for granted. First, even if our growth projections are correct, the South African population would continue to outgrow the economy, meaning that gross domestic product (GDP) per capita would fall for a fourth year in a row—and South Africans would become poorer on average, when adjusted for inflation. Thus, 2017 will need to be a year of decisive policy action to raise the productive capacity of South Africa, and ensure that all South Africans have an opportunity to make a decent living for themselves. The foremost challenge is the reduction in unemployment, which reached a 13-year high of 27.1% in 2016, and create the jobs that were targeted by the National Development Plan. 

Implementing key infrastructure projects remains crucial to unlock potential output and growth. While it continues to be important to prioritize infrastructure investment, fiscal space is constrained. Both S&P and Fitch now rate the quality of South African foreign debt one notch above sub-investment grade (or ‘junk’), both with negative outlook. We estimate that a downgrade by a major rating agency would have reduced GDP by 1% by end-2017, equivalent to an average cost of about ZAR 1,000 for each South African. Staying the fiscal consolidation course set out in the 2016 budget and Medium Term Budget Statement will therefore be crucial, in spite of mounting spending demands.

In an environment of constrained fiscal resources, structural policies provide bang for the buck—while this is longer term agenda it is part and parcel of sustainably raising the welfare of South Africans. Policy should continue to build on the recent achievements in the education sector (reflected in the 2015 assessments of the Trends in International Mathematics and Science Study (TIMSS) and higher matric pass rates), especially as education outcomes continue to be low in South Africa, including by regional standards. In addition, we have advocated previously for the prioritization of increasing the competition in product markets as well as the quick roll-out of broadband internet. In the SAEU, we argue for a review of tax incentives in order to strengthen industrial policy in the promotion of private investment and jobs— also see blog post by Sebastien Dessus


Marek Hanusch

Lead Economist and Program Leader in the World Bank’s Practice Group for Equitable Growth, Finance and Institutions

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