The biggest drag on South Africa’s economic growth – and it is not Eskom

The biggest constraint on South Africa’s economic growth is the country’s political climate – not interest rates or subdued demand from households.

This is feedback from the head of research at Momentum Investments, Herman van Papendorp, and economist Sanisha Packirisamy.

In their markets and economic outlook for April 2024, they outlined the biggest constraints on South Africa’s economic growth.

Particular attention was paid to the country’s elections later this year, with rising uncertainty limiting investments and, subsequently, economic growth.

An uncertain political climate has consistently been rated as the top constraint facing new investment by manufacturers in a quarterly survey conducted by the Bureau for Economic Research.

This is compounded by South Africa’s inconsistent electricity supply and deteriorating logistical performance.

While load-shedding is expected to have a reduced impact on the local economy, logistical inefficiencies will likely replace electricity supply as the major stumbling block to growth.

An uncertain political climate bleeds into these issues as there is a lack of political will to reform these sectors of the economy.

Furthermore, private companies and investors are hesitant to invest in these sectors, which desperately need additional funding, as they are unsure of government policy over the long term.

Thus, Momentum Investments expects meagre economic growth in South Africa of 1% in 2024, supported by marginal increases in investment and household spending.

The most significant constraints on investment and, subsequently, economic growth are shown in the graph below.

Policy uncertainty is rising in South Africa as the country is set to hold its most fiercely contested elections in May this year.

According to the latest Policy Uncertainty Index (PUI) from North-West University’s Business School, policy uncertainty rose in the first quarter of this year.

The PUI tracks news coverage of uncertainty, the views of a group of leading economists on levels of policy uncertainty, and the Bureau for Economic Research’s Business Confidence Index.

Any increase above 50 reflects greater policy uncertainty, while a decrease below 49 reflects less policy uncertainty.

The index reached a record level in the second quarter of 2023 but has since been on a downward trend – until Q1 2024.

In the first quarter of this year, the index rose edged further into negative territory, going to 65.8 from 65.5 in Q4 2023.

A large reason for this is South Africa’s upcoming elections, which have led to heightened uncertainty as the ruling ANC could potentially lose its majority for the first time since it took power.

“Not unexpectedly, the prevailing uncertainties around the pending South African election and its outcome have now also contributed to business confidence being brittle in 1Q 2024,” the report said.

“Although, as the political dynamics unfold, the economy will continue with its daily activities, the uncertain political outlook is now also weighing on investors and the markets as to possible election outcomes.”

The report highlighted the link between the policy uncertainty index and economic outcomes in South Africa.

“Empirically, it shows that when economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment, and output,” it found.

“High levels of such policy uncertainty inhibit meaningful investment and consumption.”

“Elevated policy uncertainty in many countries contributes to sluggish growth. Economic policy uncertainty then has actual consequences for the economy.”

source:The biggest drag on South Africa’s economic growth – and it is not Eskom – Daily Investor