With general elections around the corner, South Africa’s leaders are growing anxious about the state of the economy. They have plenty of good reasons. On April 7 it was made official that Nigeria had overtaken South Africa as the continent’s largest economy, after recalibrating its indicators for calculating gross domestic product.
A bigger setback came a day later, on April 8, when the International Monetary Fund published its latest world economic forecast. In the report, the multilateral organization slashed South Africa’s 2014 economic growth outlook to 2.3% from an earlier forecast of 2.8% (it did the same for 2015: to 2.7% from an earlier forecast of 3.3%). The decision was explained by the effects of persistent strikes in platinum mining, which make for a significant share of GDP, and power supply disruptions – capacity constraints” in electricity supply is holding back production, according to the IMF – as well as policy uncertainty, in the country and elsewhere. However, the nation’s finance ministry confirmed that it would maintain its forecast for the economy to grow 2.7% this year. President Jacob Zuma and his cabinet continue to cling to the belief that the overall higher economic growth that the IMF predicts for the world economy will likely benefit South Africa by means of higher export volumes. The economy only grew 2.3% in 2013.
In the meanwhile, frustration among South Africans is growing. The government has an opportunity to redeem itself on Wednesday (April 23) when it is set to announce its latest inflation figures. Consumer price index (CPI) accelerated to 5.9% in February, remaining within the bank’s target for the fifth month. Wednesday will be an important gauge, though analysts and some South African officials believe that more bad news is to come. According to some estimates, inflation will exceed the upper threshold of the central bank’s 3% to 6% inflation target band in the second quarter of this year, peak at 6.6% in the fourth quarter and drop below 6% by the second quarter of 2015. The South African Reserve Bank forecasts that consumer inflation in the continent’s number two economy will average 6.3% in 2014.
Much of the country’s monetary policy will be decided after elections scheduled for May 7. As the United States Federal Reserve continues to tighten monetary stimulus, more danger looms. Emerging economies will suffer the most from the eventual increase in interest rates in the U.S., since significant capital outflows from these countries could become the new normal. The official line is that South Africa, and other emerging economies, need to start preparing for higher interest rates globally through “strong” macroeconomic policies, but the truth is that there is very little action on the matter. It remains whether to be seen if these nations will be able to prevent the effects of such move and avoid repeating an emerging market crisis as the recent one when currencies from developing economies significantly depreciated as a consequence of the U.S Federal Reserve decision to stop pumping so much money into its markets.
Look for the repercussions of South Africa’s flailing economy – and the government’s failure to reverse its course – to play out in upcoming elections. The African National Congress (ANC), the party that has ruled South Africa since 1994, will have to answer not only for a stagnant economy, strikes and a weak outlook but also for a 24% unemployment rate and even higher youth unemployment. The ANC’s grip on power looks to be slipping, they are expected to lose many votes, adding some color to a grey economy.