It has been 25 years since South Africa gained democracy, and there is an imminent election – their 6th one in fact – since the end of apartheid. Who wins the current election (ANC party or EFF) is somewhat overshadowed by the inequality and struggling economy the South Africa persists to have. Since a year ago, the Rand has depreciated against the United States Dollar, which has been hurting the purchasing power of South African residents. The previous six months, though its fluctuations, has remained somewhat consistent despite still being nominally weak.
In 2018, South Africa dipped into a technical recession, but has recovered strongly in 2019. The Rand isn’t the only concern for locals, as the bounce-back growth of the South African economy is slowly reducing. In late 2018 it was at a 2.6% GDP rate, but dipped to 1.4% at the end of 2018, and is forecast to further reduce to 1.1%. On top of this, unemployment is a staggering 27.1% in January 2019. This isn’t so staggering to residents as it has become the norm, and reliably increasing over the previous decade since the subprime mortgage crisis.
Due to their weak nominal exchange rate, much of South Africa’s growth is driven by exports.
“We were impacted by events in the global economy. World growth is now expected to slow, constraining South Africa’s export growth forecast”, said South Africa’s finance minister, Tito Mboweni, who clearly realises the vulnerability of South Africa’s dependence on outside shocks. Despite the vulnerability, there is at least somewhat of an advantage of the weak currency in order to expand on their trade surplus through their competitively priced exports.
One surprise from South Africa’s exchange rate is that, in spite of it being nominally weak, the economy has experienced relatively high amounts of headline inflation (4.7% in 2018). CPI inflation is set to over 5% in 2019. The CPI inflation reflects the rising food prices, which have risen due to the damaging fuel inflation of around 20%.
It is intuitive to assume that much of the country, particularly the high amounts of unemployed, are possibly experiencing a drop in purchasing power. With a weak nominal exchange rate, imports are costly, and local CPI inflation is likely to exceed wage growth. Inequality between race remains high, though there is a consolation, with the gender divide getting much better, resulting in South Africa being ranked 19th from 149 countries in gender parity.
Paul Noumba Um, World Bank country director, states in a recent poverty and inequality report that South African has a dual economy. By this, he means that South Africa simultaneously has a small, highly skilled and productive economy, as well as a large poorly skilled and low-productivity economy. This results in inequality being perpetuated through wage vast differences, making the labour market very polarising.
In order to solve this issue through economic methods, the South African education system needs more investment and guidance in order to reskill the labour market. Additionally, the focus should in the short-term should be to spur on job creation in order to reduce the prolonged high unemployment rate in an attempt to not only increase purchasing power, but to reduce the race wage differences that still occur today. Fortunately, fixed investment growth is optimistically forecasted, and whilst GDP growth is dropping off, it is expected to rise to 2.1% in 2020 leaving some room for hope for the South African economy.