IMF cuts SA growth forecast for 2024 due to Transnet and Eskom

The IMF has cut South Africa’s growth forecast by 0.8% from 1.8% to just 1.0% for 2024 due to rail and port disruption at Transnet and Eskom’s electricity woes. The national election this year is also not expected to help the economy grow.

Daniel Leigh, division chief in the research department of the IMF, confirmed the cut in the outlook for South Africa’s economic growth, which reached only 0.6% in 2023.

Pierre-Olivier Gourinchas, chief economist and director in the IMF research department, said that the global economy is beginning its final descent towards a soft landing, with inflation declining steadily and growth holding up, but the pace of expansion remains slow and turbulence may lie ahead.

“Global activity proved resilient in the second half of last year, as demand and supply factors supported major economies. On the demand side, stronger private and government spending sustained activity despite tight monetary conditions.

“On the supply side, increased labour force participation, mended supply chains and cheaper energy and commodity prices helped, despite renewed geopolitical uncertainties.”

He said this resilience will carry over and that global growth under the IMF’s baseline forecast will steady at 3.1% this year, a 0.2 percentage point upgrade from its October projections, before edging up to 3.2% next year.

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Warning that important divergences remain in growth forecast

However, he warned that important divergences remain. “We expect slower growth in the US, where tight monetary policy is still working through the economy, and in China, where weaker consumption and investment continue to weigh on activity.”

Meanwhile, the IMF expects that activity in the euro area will rebound slightly after a challenging 2023, when high energy prices and tight monetary policy restricted demand. Gourinchas said many other economies continue to show great resilience, with growth accelerating in Brazil, India and Southeast Asia’s major economies.

He pointed out that inflation continues to ease. “Excluding Argentina, global headline inflation will decline to 4.9% in 2024, 0.4% lower than our October projection. Core inflation, excluding volatile food and energy prices, is also trending lower. For advanced economies, headline and core inflation will average around 2.6% this year, close to the central bank’s inflation targets.”

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Positive factors in global economic forecast

With the improved outlook, risks have moderated and are balanced and Gourinchas highlighted these positive factors:

• Disinflation could happen faster than anticipated, especially if labour market tightness eases further and short-term inflation expectations continue to decline, allowing central banks to ease sooner.
• Fiscal consolidation measures that governments announced for 2024 and 2025 may be delayed as many countries face rising calls for increased public spending in the biggest global election year in history. This could boost economic activity but also spur inflation and increase the prospect of disruption later.
• Looking further ahead, rapid improvement in Artificial Intelligence could boost investment and spur rapid productivity growth, although this will mean significant challenges for workers.

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Negative factors in global economic outlook

Gourinchas also highlighted these negative factors:

• New commodity and supply disruptions could occur following renewed geopolitical tensions, especially in the Middle East. Shipping costs between Asia and Europe have increased markedly as Red Sea attacks reroute cargoes around Africa. While disruptions remain limited so far, the situation remains volatile.
• Core inflation could prove more persistent. The price of goods remains historically elevated relative to services. The adjustment could take the form of more persistent services and overall inflation. Wage developments, particularly in the euro area, where negotiated wages are still on the rise, could add to price pressures.
• Markets appear excessively optimistic about the prospects for early rate cuts but if investors reassess their view, long-term interest rates will increase, putting renewed pressure on governments to implement more rapid fiscal consolidation that could weigh on economic growth.

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Policy changes needed

He also emphasised policy challenges in the growth forecast and said with inflation receding and growth remaining steady, it is now time to take stock and look ahead. “Our analysis shows that a substantial share of recent disinflation occurred through a decline in commodity and energy prices, rather than a contraction of economic activity.

“Since monetary tightening typically works by depressing economic activity, a relevant question is what role, if any, has monetary policy played? The answer is that it worked through two additional channels.”

Firstly, Gourinchas said, the rapid pace of tightening helped convince people and companies that high inflation would not be allowed to take hold and this prevented inflation expectations from persistently rising, helped dampen wage growth and reduced the risk of a wage-price spiral.

Secondly, the unusually synchronised nature of the tightening lowered world energy demand, directly reducing headline inflation.

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Central banks face two-sided risks in growth forecast

However, he warned that uncertainties remain and central banks now face two-sided risks. “Central banks must avoid premature easing that will undo many hard-earned credibility gains and lead to a rebound in inflation.”

But signs of strain are growing in interest rate-sensitive sectors, such as construction, while loan activity has declined markedly, Gourinchas said. “It will be equally important to turn to monetary normalisation in time, as several emerging markets where inflation is well on the way down have started doing already. Not doing so would jeopardise growth and risk inflation falling below target.”

He said his sense is that the US, where inflation appears more demand-driven, must focus on risks in the first category, while the euro area, where the surge in energy prices played a disproportionate role, must manage the second risk more. “In both cases, staying on the path toward a soft landing may not be easy.”

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Biggest challenge ahead: elevated fiscal risks

The biggest challenge ahead is to tackle elevated fiscal risks, Gourinchas said. “Most countries came out of the pandemic and energy crisis with higher public debt levels and borrowing costs. Bringing down public debt and deficits will give space to deal with future shocks.”

He also noted that emerging markets have been very resilient, with stronger-than-expected growth and stable external balances, partly due to improved monetary and fiscal frameworks, but he warned that divergence in policy between countries may spur capital outflows and currency volatility. “This calls for stronger buffers in line with our Integrated Policy Framework.”

Beyond fiscal consolidation, the focus should return to medium-term growth, Gourinchas said. “We project global growth of 3.2% next year, still well below the historical average. A faster pace is needed to address the world’s many structural challenges: the climate transition, sustainable development and raising living standards.”

He urged countries to strive to keep their economies more interconnected. “Only by doing so can we work together on shared priorities. Multilateral cooperation remains the best approach to address global challenges. Progress toward that, such as the recent 50% increase of the IMF’s permanent resources, is welcome.”