ROY HAVEMANN: Turning the 3% growth fairy tale into reality

The SA economy shrank 0.3% in the third quarter of 2024. This negative shock is in contrast to the positive news from various confidence indices, the outlook change from S&P Global Ratings agency and a strong 2024 for stock prices. It is reminder that actual growth remains fragile. Positive vibes are not enough.

For next year the Bureau for Economic Research (BER) expects GDP growth to rebound to about 2%. This is based on some positive but short-term indicators and base effects. Consumer and business confidence should continue to improve. Some slow progress on reforms will help. Consumer spending should also benefit from pent-up demand and a boost from “two-pot” retirement fund withdrawals, a stronger rand, lower inflation and some interest rate cuts.

In our base case, though, we see a “camel hump”. These short-run supports start to fade in 2026, coupled with a likely loss of momentum on the reform front. This means growth is likely to slow once again to just below 2% from 2026-29, instead of maintaining an upward trajectory. 

It is possible to see a more positive but still plausible alternative in which the country breaks free from the growth ceiling. To get there, many of the constraints that are holding back growth will have to be lifted. 

It is even possible that growth could exceed 3% if the government’s entire reform package is seamlessly executed and lands perfectly.

We all know these constraints: load-shedding, railway lines and ports that don’t work, water supply cuts and broader governance and service delivery problems. 

If we remove all of these constraints by assuming that the country succeeds in achieving ongoing reforms in all of these areas, the BER’s economic modelling shows that economic growth could exceed 3%.   

We have made great progress towards eliminating load-shedding. However, this is not enough. A durable improvement in electricity performance will require ongoing reforms. This includes finalising the unbundling of Eskom and the creation of a viable business model and balance sheet for the new National Transmission Company, to ensure a new transmission grid is constructed at scale.   

On ports, using data from the SA Association of Freight Forwarders on how our port system could be transformed through private sector concessions, we estimate that an additional 60Mt could be added to Transnet’s 151.7Mt capacity in only a few years. This will boost both export capacity and investment.   

Water reforms will crowd in private sector investment. The SA National Water Resources Infrastructure Agency will be key in creating a bankable entity that can deliver bulk water. But bulk water is not the major constraint; the real problem is delivery at municipal level. So, strengthening local government capacity (and governance in general) will also be vital.   

The biggest effect of a reform agenda focused on electricity, ports and rail is, unsurprisingly, the potential to raise exports. The country has been unable to capitalise on recent surges in commodity prices because it has simply not been able to get mining goods out of the country fast enough. Fixing this problem means exports could add up to 0.7 of a percentage point to growth. 

Investment could add a further 0.6 percentage point given the strong correlation between improved business and consumer sentiment and rising investment. Confidence should improve further as the government’s commitment to structural reform becomes increasingly recognised.   

Household consumption could add a further 0.6 percentage point to growth as a result of rising employment and real wage growth. Stronger investment and consumer spending will increase imports — taking away 0.8 percentage points.

Added together, more than 1 percentage point could be added to the country’s growth rate, taking us from a long run rate of 2% to 3%. However, it is crucial that the package of reforms happens together. Lifting the constraint to ports, for example, will not be enough. A stable supply of electricity and water will also be needed. The reform agenda needs to be delivered in lockstep.   

The government’s delivery unit, Operation Vulindlela, showed in phase one that a dedicated reform programme with a clear set of specific, measurable, ambitious but realistic time-bound goals can deliver results. Progress was made in electricity and important but limited progress in logistics and other areas.

Operation Vulindlela needs to be the focus of the government of national unity and be seen to be delivering on a clear, accelerated programme of action. There are several risks though. The biggest is the danger of overloading the small team with vague, poorly scoped reform objectives in phase two.

For example, in the newly proposed area of municipal reform there is a strong need to define exactly what Operation Vulindlela can and cannot do. Earlier this week the BER released a note on what we think can be done; it requires a targeted set of impactful reforms rather than a laundry list of unclear actions.   

The bottom line is that implementing existing structural reform plans could lift economic growth beyond 2%. But sustaining and improving that momentum is going to require far more effort. Any further reform delays will mean that 3% becomes more and more difficult to reach.   

• Havemann is senior economist and head of the BER’s Impumelelo Economic Growth Lab.