South Africa: Structural Issues to Dominate Long Term Growth
Bottom line: We expect 1.3-1.5% GDP growth in South Africa in the 2025-2030 period. We are concerned with the structural problems affecting economic dynamics negatively, including loadshedding, transportation bottlenecks, and shrinking trade surplus. Despite structural problems; growing population, young labor force and likely increasing productivity are potential strong drivers for South Africa GDP growth in the coming years, thus we expect South African economy to grow by 1.1% in 2024, 1.6% in 2025, 1.3% in 2026 and 1.3-1.5% in 2027-2030. As noted, the growth outlook can be suppressed due to uncertainty over future power cuts and logistics constraints. Supply side issues, labor market mismatch and energy restraints can also ignite inflationary expectations and risk balanced growth trajectory in 2025-2028.
Figure 1: South Africa GDP Growth Forecasts to 2030 (%)
Source: Continuum Economics
- Growing population and strong labor force: The population is on the rise (Figure 2) and we see that there will be an increase in the working age population, and a higher participation rate in 2025-2030, positively contributing to the GDP growth.
- High unemployment, nepotism and corruption: One drag can be the high unemployment rate and government's having difficulties in creating new jobs for the population, as nepotism and corruption continue to be serious problems that the government should tackle with. The country also needs a pickup in foreign direct investment to boost employment prospects, but this is a function of addressing the structural energy and logistics crisis and a credible business friendly government (this is unlikely to be the outcome of the 2024 election).Unemployment in the 15-24 yr group is huge at 64%, but unemployment for women also remains very high at 41%.
- Population dividend, and productivity: South Africa could be helped by its population dividend, with the labor force also set to grow at in 2025-2030. Reaping the demographic dividend should remain as a top priority for the government to make use of this opportunity. The innovation, smart management and institutional arrangements that favor businesses and growth remain limited however as the country requires structural reforms to enhance demographic dividend, such as encouraging job creation and investments improving productivity, reallocating workers across productive sectors, labor training focused on catching the latest manufacturing and technological developments.
Figure 2: Population Forecasts to 2030 (Thousand)
Source: Continuum Economics
- Power cuts to restrain production, and agreements with China on energy: We foresee load shedding will continue to set the scene between 2024-2026, particularly through suppressing production. We expect a positive change to occur in the electricity outlook after 2026 as the country had targeted lifting the share of renewable energy in its power generation mix from 11% currently to 41% by 2030, and we think both private and government investments may accelerate in 2025-2028 -though the 41% target will be tough to achieve-. South Africa and China having recently signed agreements on cooperation in clean energy investments and electricity transmission may help the transition.G7 support has also been evident.
- Domestic demand, capacity utilization and industrial production momentum: We expect household demand will continue to boost industrial production amid outlays on social support. According to our forecasts, capacity utilization rates will remain at around 78-80% range.
- Need for financing: The country still has the need for large domestic and international financing. We think the government fiscal balance and debt trajectory would remain cloudy in 2024-2026 as fiscal room remains limited to fund structural reforms, productive investments, social spending needs and renewable energy efforts despite effort enhancing revenue collections, and improving the institutional fiscal framework. The financial burden both on government and private sector are at high levels and we suspect this will continue to be the case in 2025-2030, which will likely suppress GDP growth.
- Shrinking trade surplus and structural headwinds: We think the economy will be supported by a trade surplus in 2024-2030, but trade fluctuations will remain, while fall in trade surplus is also possible given our forecast of China growth slowing to 3% from 2027 onwards.
- Labor mismatch problems: Labor mismatch problems in terms of skills and availability of workers in the urban community can cause problems for the labor market. Labor training focused on catching the latest manufacturing and technological developments and reallocating workers across productive sectors can help but the government should be more determined to solve this issue. This can also push up wage inflation and underpin CPI inflation, it could take years before this comes through, given existing underemployment and also unemployment.
Technology is also one positive driver of productivity in the 2020's alongside increased climate change investments but the impacts of Tech/AI are expected to be limited for the country since the priority will be on structural problems, inflation and loadshedding.