Investment can boost South African GDP by 19%

03 November 2015 Authored by Consultancy.co.za

South Africa is one of the strongest economies on the African continent, its business environment is mature and its economy diverse. The country remains one of the poorest in terms of equality, however, with unemployment at 25%, and 41% of its population struggling to get by. While future growth in the economy is due to remain robust at 3.6% annually until 2030, strategic investment is able to boost its annual economic output by 1.1% according to McKinsey, potentially accelerating the country’s development.

In a recent report from McKinsey Global Institute (MGI), titled ‘South Africa's Big Five: Bold priorities for inclusive growth’, McKinsey & Company’s research arm models how changes within key sectors of the economy will improve its long term outlook.

The strength and weakness

Just over two decades have passed since apartheid was abolished in South Africa. Today, following the vision of Nelson Mandela, the country enjoys the liberties associated with the democratic process. South Africa has since grown to be the continent’s second largest economy after Nigeria. Its economy has almost doubled in real terms, up from $139 billion in 1994 to $261 billion in 2014; raising millions from poverty while infrastructure programmes have seen a widening in access to basic conditions, such as water, sanitation, electricity and transport. Economic progress is most evidently found in its major cities, which have become hubs of development and innovation.

Potential real GDP growth from big five

Yet, while the country has made strides in recent years, a number of structural issues remain. Real growth has remained relatively low at 3%, well below the 4.5% average seen across the sub-Saharan Africa region. In 2014, growth even dropped to a low 1.5%. Income growth has also been anaemic: GDP per capita has averaged just 1.3% annual growth since 1994. One of the largest issues faced by the country remains its chronically high unemployment rate. At 25%, it is one of the highest in the world, which stands at 35% when including workers no longer looking for work.

Youth unemployment stands at 52%, and while economic activity has seen the creation of 2.8 million new jobs, its population increased simultaneously by 4.1 million to around 53 million, thereby nullifying the benefits. As a result of low labour force participation at just 57%, a fifth of the population is on $1.30 a day, making the country one of the most unequal societies in the world.

South Africa Urban Wealth Growth

Growth fundamentals

The report highlights that while the economy has slowed in recent years, its fundamentals remain relatively strong. The country has the highest competitive ratings in Africa according to the World Economic Forum, and tops the global rankings for strength in auditing and reporting standard as well as for regulation of securities exchanges. Its financial markets are the seventh most developed in the world, and the country has the ninth most efficient legal framework in the world. A growing number of people in urban centres have joined the consuming class, with substantial expansion expected further until 2025, as the percentage of the population struggling drops from 41 to 27. By 2025, nearly three-quarters of urban households will be members of the consuming class.

According to McKinsey, however, there is further scope for considerable growth in the South African economy. The aim of increasing growth through increased consumption has lost momentum and, according to the firm’s modelling, raising investment and increasing exports is crucial for accelerating and sustaining growth. This can be achieved through investment in five big projects, including creating a globally competitive hub of advanced manufacturing; raising infrastructure productivity; harnessing natural gas for a reliable power supply; increasing service exports; and raising growth along the agricultural value chain.

Potential real GDP growth from big five

The ‘big five’ projects have the potential to boost the average growth of South Africa from the current consensus number of 3.6% annually to 4.7% by 2030, with an addition of 3.4 million jobs in the same period. The synergistic effects are difficult to calculate; therefore, the 1.1% increase is stipulated. The cumulative effect would see the South African economy growing larger than the currently expected trajectory by 19% in 2030, representing an additional $89 billion.

Improving manufacturing to global best practice could add up to R540 billion annually and 1.5 million new jobs, while infrastructure spending would add an additional R260 billion and 660,000 new jobs. Improving electricity generation could produce a further R250 billion, and service exports and changes in the agricultural value chain may add a further R245 billion and 460,000 new jobs and R160 billion and 490,000 jobs respectively.

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