South Africa Economy Recovering But Future Remains Uncertain

Although no longer the largest, the South African economy is still the most diversified and developed on the continent. After experiencing a 0.4% contraction in economic growth during the fourth quarter of 2016 and 0.3% in quarter one of 2017, the economy went into a technical recession.

Economic growth of 2.5% over the last two quarters has signaled a recovery. Strong performances in the agricultural (33.6% growth) and financial services (3.5% growth) sectors, together with an increase in the level of household consumption, up from -2.7% in quarter one to 4.7% in the second quarter have contributed to the recovery, futuredirections.org reported.

Although long-term indicators show subdued growth overall, the recovery does help to reduce the fears of a deep recession. Overall, the recent recovery of South Africa and Nigeria (1.3% growth in GDP since 2016), which together account for almost half of the gross domestic product of sub-Saharan Africa could boost trade and productivity in the region.

The reasons for the recovery are largely short term. The growth in the agricultural sector was stimulated by increased harvest sizes attributable to the end of a long-running drought and efficiency gains from mechanization.

The mining sector improvements were related to higher production levels of gold and coal combined with higher commodity prices which had the flow-on effect of increasing the demand for financial services. Both mining and agriculture also benefited from improvement in the global economy, which increased the value of exports.

More broadly, over the past two years, economic growth in South Africa has been 2.2% lower than the average level of global economic growth.

Foremost among the causes of that poor performance is the high rate of unemployment, which, at 27.7% in the second quarter of 2017, remains unchanged from the thirteen-year high recorded the previous quarter, and the accompanying persistent poverty.

It has been assessed by the Federation of Unions of South Africa that, to achieve any meaningful reduction in unemployment, the economy will have to grow by between 5.1% and 5.4% annually between 2011 and 2030. Clearly, that has not happened so far.

In fact, the South African Reserve Bank has already downgraded its 2018 and 2019 GDP growth forecasts by 0.2% and 0.3% to 1.5% and 1.7% respectively. Internal factors such as political instability and poor economic management remain an impediment to sustainable longer-term growth and the implementation of much-needed structural reforms, some of which are included in the government’s National Development Plan.