South African Economy Faces Uncertainty Even as Omicron Impact Wanes

Even though matters have improved recently, there are still cross-currents to consider, looking forward. Domestic and foreign factors keep uncertainty elevated and the positive economic forecasts are already starting to change for the worse.

Central bank hikes – MPC model more dovish

At the latest monetary policy meeting, the South African central bank decided to hike its benchmark interest rate by 25 basis points, for the second time since November 2021. Although the rate is now at 4%, the implied policy rate path indicates a rate of 6.55% by the end of 2024, below the November forecast seen at 6.75%.

Still, the rate is now at its highest in two years, a level that should help cool down the inflation that is raising concerns all across the world. Despite the central bank raising rates, the Rand erased some of its earlier advances.

Those who work with a forex broker have witnessed the currency weakening against the US Dollar, as forecasts for future rate hikes turned more dovish. Financial markets have been on edge due to concerns related to monetary tightening, a fact that can bring inflation down but also hurt economic performance.

However, it seems that the markets are ahead of the curve, given most central banks will probably need to hike several times to meet current expectations. The large debt established over the past two years, in order to counteract the effects of the pandemic, also supports a slower rate hike process. Debt service payments will gradually increase, leaving businesses and people with less money to spend.

Slower growth rates globally

Largely due to the emergence of the Omicron variant, the International Monetary Fund (IMF), lowered the global economic growth expectations for 2022 to 4.4%, a headwind for the fragile South African economy.

The country is facing similar issues as the rest of the world is, namely elevated inflation, which accelerated further to 5.9% in December 2021 – above what markets expected. This comes on the back of high energy and food prices, as well as a rise in costs related to transportation and housing.

COVID-19 cases low – economic activity should pick up

Economic prospects for the short-term are improving, mainly because new COVID-19 cases are down around 90% from the all-time high. That is a source of relief for businesses since consumerism is back on the rise and approaching normal levels.

Reports of a new Omicron variant, named BA.2, are now in the spotlight, mainly because early indications point to an even higher transmissibility rate. It was already spotted in various countries around the world, including South Africa, yet thus far new cases don’t seem to be picking up pace.