The International Monetary Fund (IMF) released its October World Economic Outlook (WEO) yesterday with upwardly revised global economic growth forecasts. The global growth is now expected at -4.4%, up from -5.2% projected in its June WEO Update, largely reflecting better than expected outcomes in second quarter economic growth for advanced economies. Upward revision to 2020 economic growth has been partially offset by downward revision to 2021 economic growth, which is now expected at 3.9% from 4.8% five months ago, reflecting the expected impact continued social distancing measures.
All major advanced economies growth estimates have been revised up somewhat for 2020 and down for 2021 except Spain with an upgrade for 2021 and Canada with upgrades for both 2020 and 2021. The biggest upward revision was for the United States with growth revised by 3.7 percentage points to -4.3% from an earlier forecast of 8.0%. The US also had the highest downward revision of 1.4 percentage points to 3.1% for 2021. The Euro area and the United Kingdom, major trading partners accounting for a combined 34% of South Africa’s trade, are expected to contract by 8.3% and 9.8% this year before picking up to 5.2% and 5.9% respectively.
Within emerging markets, growth has been marginally revised lower by 0.2 percentage points to -3.3% from -3.5% previously, in 2020. The 2021 projections have been upgraded by 0.2% to 6.0%. The marginal revisions for both years masks more uneven dynamics at the country level. China is the only country expected to register positive growth of 1.9% in 2020 as it contained the virus more quickly and restarted economic activity ahead of all countries, thus benefiting by being the supplier of goods to the rest of the world. All other emerging markets are expected to contract this year, with a few, including India, Indonesia, Malaysia, Philippines, Thailand, and Vietnam whose growth have been revised lower. South Africa’s growth forecast for 2020 has been left unchanged at -8.0% while downwardly revised by half a percent in 2021 to 3.0%.
There are two implications of these growth forecasts revisions for South Africa from a trade point of view. First, the upward revision to global growth, particularly advanced economies and China imply an improved expectation for external demand for South Africa’s exports. Second, the downward revision of 2021 growth expectations implies that export demand for 2021 will likely be lower than previously expected. That said, the biggest constraint on South Africa’s recovery in exports will likely be domestic rather than external.
Manufacturing production capacity and operation of the mining industry is energy-intensive. Due to well known financial and operational issues, the State power utility Eskom has had the most severe load shedding in 2020 that in any other year since it started in 2008. Expectations are that this will remain a binding constraint - independent of the recovery in external demand - on domestic production for at least the next two years.
The other constraint will remain the cost and efficiency of the transport and ports system to facilitate exports. The reforms of the transport networks, together with the energy sector are unlikely to be achieved in the near term, which means that they will remain a binding constraint on export growth.
While the developments externally matter for the domestic economic recovery, it is domestic constraints that will continue to be a drag on economic growth and job creation. Which is why the economic recovery plan, which is expected to be unveiled by President Ramaphosa this week is very important. At its core, it should address the inadequacies in network industries by encouraging private sector investments. The quicker the implementation the faster growth will relink to global developments. Any delay will ultimately mean that, like the experience of the last decade, South Africa will once again be left behind in this post-covid-19 recovery, with dire social consequences for the country.