JOHANNESBURG – The world is entering an era of new economic challenges, even as the recent ones have yet to be overcome, says South African Reserve Bank (SARB) Governor Lesetja Kganyago.
“The global economy continues on a long recovery path from the pandemic. This path has been a troubled one, and despite better prospects in recent months, remains beset by risks and vulnerabilities built up during the pandemic.
“Inflation remains stubbornly high, and public debt levels globally are at record levels,” the Governor said on Tuesday.
Addressing the 104th annual Ordinary General Meeting of the SARB shareholders in Pretoria, Kganyago asserted that technological development carries both risks to cybersecurity and the hope of large and sustained boosts to global productivity.
“Inflation remains a major policy concern for central banks globally. Although global inflation declined from 8.7% in 2022 to 6.8% in 2023 and continues to ease in 2024, it remains high relative to the 2–3% inflation targets that many countries are trying to achieve.
“Restrictive monetary policy, along with the recovery in supply chains and other pandemic-related bottlenecks, has helped inflation to recede from its 2022 highs. However, global disinflation has slowed recently, as is well illustrated by consumer price inflation in the United States (US) still sitting at 3% relative to their 2% target,” Kganyago said.
He said the slow pace of disinflation reflects a pattern of lower imported inflation but higher services inflation across most economies.
“In some [economies], rising wages and sustained pent-up demand for services have been key factors. In emerging markets specifically, fiscal challenges and sustained currency depreciations have played more of a role.
“Policy commitment to reduce inflation back to targets has been strongly signalled around the globe, and central banks have generally been cautious in their approach to policy. Deepening geo-economic fragmentation, higher temperatures and other supply-related risks raise concerns about the long-term prospects for inflation, and considerable effort is going into reassessments of neutral real rate levels,” the Governor said.
While inflation remains higher than desired, global economic activity has proven to be more resilient than expected.
“Global growth surprised higher at 3.3% in 2023, despite considerable divergence in growth across individual economies. Generally, however, global growth rates are expected to remain below pre-pandemic trends. This reflects the impact of protectionist measures on global trade, relatively tight financial conditions as well as uncertainty of future policy trajectories,” Kganyago said.
Domestic real economy developments
Despite South Africa’s low economic growth, employment levels have recovered the 2.2 million jobs lost during the height of the pandemic.|
“As of the first quarter of this year, total employment surpassed its 2019 level. Nonetheless, job creation has been too slow and not enough to offset the growth in the labour force, leaving the unemployment rate elevated at 32.9% in the first quarter of this year,” the Governor said.
The South African economy slowed to 0.7% in 2023 from 1.9% in 2022, and remains well below growth in peer emerging markets.
“Load shedding and logistical challenges have been weighing heavily on economic activity, depressing the credit appetite of businesses and the spending of households.
“South Africa’s tailwind for growth coming from strong terms of trade continued to fade, despite still remaining at historically good levels. Exports also suffered over the past 12 months from energy and logistics challenges as much as price factors. Imports were also muted by logistics.
“As energy and logistics constraints continue to ease, the growth outlook will also improve. The domestic economy is expected to grow by 1.1% this year, rising to 1.7% by 2026, as both household spending and investment start to strengthen,” Kganyago said.
Domestic inflation dynamics
As with the global trend of moderating inflation, South Africa’s headline inflation decelerated over the past year, falling from 6.9% in 2022 to an average of 6% in 2023.
“These annual averages, however, hide the ongoing volatility in the underlying components of inflation, in turn demonstrating the risks and uncertainty marking the disinflation path.
“Since September of last year, headline inflation has been fluctuating between 5% and 6%, with frequent monthly setbacks coming from fuel, food and services prices.
“In February, core inflation rose by 0.4 percentage points to 5%, propelled sharply higher by medical insurance inflation. Encouragingly, as of June, core inflation has moved to 4.5%,” Kganyago said.
The SARB sees core inflation averaging 4.6% this year, from 4.8% last year. Inflation expectations eased in the first half of this year, but still remain well above the midpoint of the target band.
“While headline inflation came out between 5% and 6% for much of the past year, our current forecast shows it easing to 4.9% this year, pulled lower mainly by softening food and fuel inflation, and resting at the midpoint in 2025 and 2026.
“Even with some quantitative and qualitative adjustments to risk perceptions over time, the Monetary Policy Committee (MPC) has felt it appropriate to maintain the repurchase (repo) rate at 8.25% – a level set in May of 2023,” he said.
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