Reserve Bank governor warns of new era of economic challenges

Reserve Bank governor, Lesetja Kganyago, warns that the world is entering a new era of economic challenges, even as the recent ones have yet to be overcome.

Kganyago was speaking at the 104th annual Ordinary General Meeting of the bank’s shareholders on Tuesday.

There is also little fiscal or monetary policy space available to deal with the risks that could emerge to financial stability, renewed inflation pressures or even the growing challenge of climate change.

The global economy continues on a long and troubled recovery path from the pandemic and despite better prospects in recent months, remains beset by risks and vulnerabilities built up during the pandemic, he said.

“Inflation remains stubbornly high and public debt levels globally are at record levels. Technological development carries both risks to cybersecurity and the hope of large and sustained boosts to global productivity. Meanwhile, 22 July appears to have been the hottest day on Earth in recent history.”

Kganyago emphasised that 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% to 3% inflation targets that many countries are trying to achieve, Kganyago said.

“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 US still sitting at 3% relative to their 2% target.”

He said the slow pace of disinflation reflects a pattern of lower imported inflation but higher services inflation across most economies. In some, 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.

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Policy commitment around the globe to reduce inflation

“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.”

He believes that greater stability in global affairs and more sustainable fiscal policy settings across the G20 countries would help to dampen uncertainty and enable longer-term horizons for policymakers, firms and households.”

Moving on to domestic real economy developments, Kganyago said despite varied sectoral performances, output in 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.

“However, despite such weak growth in output, employment levels 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.”

He pointed out that 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, but as energy and logistics constraints continue to ease, the growth outlook will also improve, he said. 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.

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Inflation in South Africa

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, but Kganyago says these annual averages hide the ongoing volatility in the underlying components of inflation, in turn demonstrating the risks and uncertainty marking the disinflation path.

“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 repo rate at 8.25%, a level set in May of 2023.”

Turning to financial stability, he said the Sarb continued to ensure that the financial system remains resilient, without any systemic threats to its functioning materialising during the 2023/24 financial year, despite the risks to the outlook that include sustained geopolitical tensions, sticky inflation and government debt levels that remain uncomfortably elevated.

These risks coincided with an unprecedented number of national elections around the world, leading to some uncertainty and heightened market volatility. Kganyago said South Africa is still confronted with its government’s growing debt levels and ever-higher debt-servicing costs, as well as domestic financial institutions’ high exposure to that debt.

“Although we are working hard to exit the Financial Action Task Force (FATF) grey list, the effects of being greylisted are felt as foreign counterparties apply greater scrutiny to our domestic institutions.”

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Warning about climate change

Kganyago also warned that at the same time, the effects of climate change are becoming more frequent and more severe, as highlighted by the recent winter storms that lashed at least four provinces and necessitated the declaration of regional states of disaster.

As part of its ongoing efforts to understand and mitigate the risks associated with climate change, the Sarb conducted its first comprehensive stress test of South Africa’s major insurance companies during the 2023/24 period, which included a climate change component. Going forward, climate-related risk will increasingly feature as part of the Sarb’s stress-testing scenarios, he said.