South Africa’s job losses threaten growth and fiscal account

Article tags EconomyGlobalMiddle East and AfricaCountry AnalysisEIU Store

South Africa’s unemployment rate climbed to a new record of 34.9% in the third quarter of 2021, from 34.4% in the second quarter, according to new data that were released on November 30th. Joblessness has been exacerbated by a week of civil disorder, property damage and economic disruption in July, underlining the tough conditions facing firms and households.

Why does it matter?

A relaxation of coronavirus-related restrictions on October 1st, to the lowest tier, in response to a decline in covid‑19 cases—which hinted at a pick‑up in employment, buoyed by a partial recovery in the labour-intensive tourism and hospitality sector—is now looking premature. Rising risks related to the new Omicron variant of the coronavirus are threatening South Africa’s economic recovery, with an ongoing negative impact on the labour market. Leading indicators for the labour market point to job losses of almost 660,000 in the third quarter of 2021, including 572,000 formal positions. This brings the number of employed down to 14.3m, just 36% of the working‑age population, which represents one of the lowest labour absorption rates globally. Almost all sectors shed workers, with trade and commerce, as well as social and community work, showing the biggest declines in the most recent data. 

A second major employment trend showed a steep rise in discouraged job seekers, whcih has been magnified by the July unrest and the peak of a third wave of covid‑19 cases, leading to a matching fall in the labour force. The number of jobless declined in the third quarter (by 183,000, to 7.6m), but the unemployment rate still climbed because of a smaller labour force. Including discouraged job seekers in the workforce would have in effect produced an unemployment rate of 44.6% in July‑September, another unwelcome record. Firms will be cautious and reluctant to hire and invest because of the uncertain outlook, combined with anticipated weaker domestic demand, particularly for the remainder of 2021 and into the early part of 2022. 

The government will be reluctant to introduce another job‑destroying severe lockdown, and will maintain pandemic-related higher welfare payments, to provide some relief and curb the risk of wider social discontent. We expect the extra benefits to be extended beyond the planned March cutoff point, but they are unlikely to become permanent. Fiscal consolidation will be a major challenge, particularly for the first half of 2022, as political will to cut spending will be delayed and the vaccine rollout programme accelerated to inoculate 70% of the population. Keeping within the 2022 public-spending cap rules will be increasingly tricky, and efforts to circumvent the rules are already emerging. On the fiscal income side, there is little room for higher taxation rates, given the forecast for weaker real GDP growth and pressure to sustain higher social and healthcare spending.

What next?

The identification of the new Omicron variant on November 25th, accompanied by the fresh imposition of global travel restrictions on Southern Africa, threatens to negate the hoped‑for economic recovery and delay the government’s fiscal consolidation effort to late 2022. The precise threat posed by Omicron remains unclear, but early signs suggest that our real GDP growth forecast of 2.4% for 2022 will be subject to a slight downward revision, to 2.1%. On the fiscal front, the overall deficit, which we had forecast at 6.3% of GDP for 2022, is now expected to be a little wider, at about 7% of GDP, which still represents an improvement on an estimated 8% of GDP in 2021.

Wed, 08th Dec 2021 Article tags EconomyGlobalMiddle East and AfricaCountry AnalysisEIU Store