The Rand has lost 8.5% of its value against the US dollar, as the cumulative weight of load shedding, Covid-19, and the KZN floods turned it into the worst performing currency in the world recently. Add to this the impact of higher inflation and the country’s economic outlook is not bright at all. The return of Stage 4 load shedding due to record unplanned breakdowns, the Covid-19 test positivity rate reaching a three-month high, and the disruptive effects of the KwaZulu-Natal flooding on economic activity are the main drivers behind the depressing economic outlook, according to the PwC South Africa…
The Rand has lost 8.5% of its value against the US dollar, as the cumulative weight of load shedding, Covid-19, and the KZN floods turned it into the worst performing currency in the world recently.
Add to this the impact of higher inflation and the country’s economic outlook is not bright at all.
The return of Stage 4 load shedding due to record unplanned breakdowns, the Covid-19 test positivity rate reaching a three-month high, and the disruptive effects of the KwaZulu-Natal flooding on economic activity are the main drivers behind the depressing economic outlook, according to the PwC South Africa Economic Outlook: the next challenge: salary and wage increases.
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The aftermath of the flooding was devastating, with eThekwini reporting that most of its 1 152 formal businesses were affected, while data from the Google Community Mobility initiative indicates that workplace activity in KwaZulu Natal was 6% below the pre-pandemic level on 13 April, with the rest of the country 8% higher on average.
PwC says the disruption of business and consumer activity has a notable impact on the South African economy because KwaZulu Natal is the second largest provincial contributor to the national economy after Gauteng, and employed 2.4 million workers at the end of last year.
eThekwini is a large contributor to the KwaZulu Natal economy, accounting for more than half of the provincial GDP and providing jobs to 1.5 million people, while the Port of Durban is the largest harbour and busiest port in the country, handling 60% of total container traffic to and from South Africa.
Compared to the damage caused by the unrest in July 2021, when 300 bank and post office sites as well as 1,400 ATMs were affected, as well as 260 malls, this time the damage is much larger and more widespread, with destruction to both public and private infrastructure, PwC says.
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KZN floods affected transport, manufacturing and agriculture
The provincial government estimates an infrastructure repair bill of R17bn so far, with transport, manufacturing and agriculture affected.
Transnet estimates it would take seven weeks to resume operations on its damaged main railway line between Durban and Cato Ridge, while public enterprises minister Pravin Gordhan said last week that the Port of Durban had a backlog of up to 9 000 containers that would take more than a week to clear.
Manufacturing is the largest economic sector in eThekwini and an important job creator. Vehicle manufacturer Toyota, paper manufacturers Mondi and Sappi, and Pioneer Foods all had to temporarily close operations.
The South African Canegrowers Association also reported damage to crops on 2 500 hectares, estimating a loss of nearly R200 million in lost produce and about R30 million in destroyed farming infrastructure at the epicentre of the country’s sugar industry.
Manufacturing and transport combined account for 45% of eThekwini’s economy and 30% of the provincial economy and will feel the biggest negative impact on activity in the short to medium term.
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Production levels already declined in March
The latest edition of the S&P Global South Africa PMI reported that local private sector production levels already declined in March before the flooding, indicating that shortages of input materials and ‘soaring input costs’ disrupted business activity with a decline in availability of Chinese inputs thanks to new lockdowns in the country’s key industrial areas.
PwC also points out that the disruption in supply of commodities and goods from Ukraine and Russia since February and now also from China resulted in a lengthening of local input lead times during March, that in turn translated into weaker private sector output levels and an increase in order backlogs.
The latest S&P Global Report also indicated that inflationary pressures were at the forefront of the South Africa PMI survey data in March, with the PMI’s index for business costs increasing at the quickest rate in nearly six years due to a spike in some international commodity prices linked to the Russian invasion of Ukraine.
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Higher overall inflation affects wage demands
Higher fuel prices were a key driver of higher input costs, although local production costs were already rising quickly even before the invasion. While fuel price relief measures will put R10 billion back into motorists’ pockets, this is only temporary, PwC warns.
Higher overall inflation is now also increasing trade unions’ salary and wage expectations.
With a powerful local labour movement able to shape remuneration trends due to the country’s high rate of unionisation, trade unions’ expectations of salary and wage increases are highly influential in remuneration agreements.
PwC expects a general increase in consumer price inflation this year compared to 2021 and says South African companies will have to make upward adjustments to salaries and wages.
With South Africa retaining its position as the country with the highest unemployment rate in the world at 35.3% in the fourth quarter of last year.