The World Bank has lowered its baseline growth forecasts for South Africa for 2011, from 3.5%, in July, to 3.2%, and has warned that the downside risks to the country’s growth outlook for 2012 and 2013 have also increased.
The revision was published in late November as part of the bank’s second ‘South Africa Economic Update’, which cut the 2012 growth outlook by a full percentage point to 3.1%, when compared with the 4.1% published in the inaugural country report. The 2013 gross domestic product (GDP) forecast was also trimmed to 3.7%, from 4.4% in July.
It was likely to place yet more pressure on South Africa’s goal to create five-million jobs by 2020 under the New Growth Path, as well as the aspiration to create 11-million jobs by 2030 as outlined in the recently released National Development Plan (NDP) of the National Planning Commission. In fact, the NDP’s jobs target is premised on yearly GDP growth of around 5.6%.
The report’s co-author Fernando Im indicated that the World Bank’s adjustments were in line with the institution’s revised outlook for global economic growth, which had been lowered by 0.8% to 2.7% for 2011.
The global downgrade was attributable mainly to revisions in high-income countries, which were now only expected to expand by 1.5% in 2011, owing mainly to the uncertainties associated with the resolution of the sovereign debt crisis in the eurozone and the inability of US politicians to reach consensus on how to deal with that country’s debt problem.
But the GDP growth outlook for developing economies had also been cut by the bank from 6.3% in June to 6.1%. In addition, there was a warning that developing countries, including South Africa, were more vulnerable to the current slowdown than had been the case ahead of the global economic crisis of 2008 and 2009, which precipitated South Africa’s first recession for 17 years in 2009.
Im said that this vulnerability stemmed from the fact that governments had less monetary and fiscal policy space to respond to the slowdown, while recent commodity price declines would affect revenues in those economies that export resources.
“Unlike prior phases of uncertainty in the eurozone, the current episode features substantial contagion, with risks spreading to hitherto unaffected eurozone countries and father afield to Japan and emerging economies, including South Africa,” the report cautioned.
Lead economist Sandeep Mahajan added that the perceived increase in the contagion risk flowed from the fact that, during the “earlier phases” of the crisis, markets had a stronger expectations of governments and their ability to respond.
“What you see now is markets losing faith in the way the response [from governments] has evolved, both in Europe and to a lesser extent in the US,” he said, adding that the scale of the problem had also increased as the countries affected were no longer the relatively small economies of Greece, Ireland and Portugal, but rather the far larger economies of Italy and Spain.
For South Africa the immediate risk related to a possible fall off in foreign investment, which was primarily in the form of portfolio flows, which would reduce the pool of external savings that the country currently required to offset its low savings rates. But in the longer term it could also dampen the demand for South African exports.
A one per cent decline in European growth rates could lower South Africa’s growth by as much as 0.7%, owing to the fact that the European Union (EU) as a bloc remained the country’s largest trading partner. Further, the EU was the largest consumer of South African manufactured exports, with countries such as China mostly consuming locally produced commodities.
In response to a Parliamentary question, Trade and Industry Minister Dr Rob Davies indicated that the automotive industry faced serious risks as a result of the current problems in Europe and the US.
He indicated that the share of automotives exported to Asia had been substituted by exports to the EU and the US over the past five years. "In 2006, Asia received 43% of all automotives exported from South Africa and Europe and the US received 14.3% and 14.6% respectively. This changed dramatically in recent years, with Europe and the US absorbing 31% and 43% of total automotive exports from South Africa," Davies said.
But he also stressed that South Africa's most prominent markets within the eurozone, such as Germany and France, were also "the most stable economies within the EU".
The Department of Trade and Industry was, however, also undertaking a number of strategic interventions in the Brics countries of Brazil, Russia, India and China to ensure that South Africa was in a position to be able to shift products from "ailing markets to more stable high-growth markets".
"Fortunately South Africa’s trade sector is relatively hedged against these risks as South Africa’s exposure to the debt-ridden areas has been reduced over the past three years. A decline in exports to Europe and the US has been offset by an increase in exports to Asia and Africa," he said.
The EU's market share of South African imports, Davies added, declined from 32% in 2006 to 23% in 2010, whereas exports to China increased from 3.5% to 10% of total South African exports. Exports to the rest of Africa expanded by 70%, from R50-billion in 2006 to R85-billion by the end of 2010.