Interest rates continue to climb as the South African Reserve Bank signals upside risk to the inflation outlook, professional services firm PwC’s ‘South Africa Economic Outlook’ report, released in March, notes.

The report provides a perspective on the local impact – specifically on inflation and economic growth – of disruption stemming from Russia’s invasion of Ukraine and sanctions imposed against Russia as a result.

PwC says the local inflation outlook has deteriorated as international commodity prices rise following the invasion of Ukraine.

South Africa’s consumer price inflation moderated from 5.9% year-on-year in December 2021 to 5.7% year-on-year in both January and February – though the latest numbers remained near the top end of the 3% to 6% range targeted by the South African Reserve Bank (SARB).

The report notes that inflation risks have escalated over the past month given global commodity market developments.

Global wheat prices, for example, have increased to a 14-year high.

Besides developments in Central and Eastern Europe, Argentina and Brazil have been facing abnormally dry conditions linked to the La Niña weather pattern, the report points out.

On the energy front, it notes that South Africans already paid R1.46 a litre more for petrol this month, with the risk of a similar increase in April.

PwC expects inflation to average 5.2% this year under its baseline scenario, from a mean of 4.6% in 2020.

However, if international market developments remain unfavourable deep into the second half of the year, average inflation could increase to 5.9% for this year.

The report highlights that the SARB Monetary Policy Committee warned on March 24 that South Africa’s commodity price basket is forecast to rise by 8% for the year as a whole.

This is a sharp departure from import deflation seen in recent years, the report indicates.

After raising interest rates in November, January and March, the upward trend is set to continue over the remainder of the year.

The report indicates that the upward pressure on food, fuel and electricity prices will adversely impact all households during the year; however, low-income households will be the most vulnerable to higher food costs.

The report points out that the upward pressure on commodity prices will adversely impact all industries during the year.

However, owing to varying production cost breakdowns, individual industries will be impacted differently.

For example, the primary and secondary sectors have a very high exposure to fuel and transport costs in delivering their goods and services, with less dependence in the services sector.

In terms of gross domestic product (GDP), the report highlights an uneven recovery from the pandemic-hit 2020, as agriculture and financial services perform the best.

The country’s economy expanded by 4.9% in 2021 following the deep recession in 2020.

The report also notes that there is progress in getting economic activity back to pre-pandemic levels, with a large number of industries currently seeing activity levels above those experienced prior to Coivd-19.

The report highlights that, with the disruptions in Central and Eastern Europe, the global economy has deteriorated as the conflict hits supply chains.

It points out that global shipping costs have surged and commodity prices jumped as the conflict constrains exports.

The report adds that the war in Ukraine has disrupted production activity in that country as well as in its neighbours’ economies, while economic sanctions impact on the ability of Russian and Belarusian companies to trade goods and services across borders.

As a result, global supply chains have been further disrupted, with hundreds of multinational companies shutting their operations in Russia.

From a food security perspective, Ukraine is known as the ‘Breadbasket of Europe’. In turn, Russia is one of the biggest players in the global energy (oil and gas) market.

International commodity prices have reacted to the disruption in key supply chains of wheat and fertiliser, among other soft commodities, the report highlights.

Energy prices (oil and gas) have also spiked on concerns about supply shortages to major economies.

Also, many insurers are either refusing to cover vessels sailing into the Black Sea or demanding huge premiums to do so.

These developments are contributing to even greater concern over producer and consumer price inflation after the global economy entered the year with heightened inflation rates, the report notes.

For the South African economy, the report indicates a weaker outlook as global growth slows and load-shedding increases.

Global GDP growth could be one percentage point lower this year versus projections made before the conflict, PwC estimates.

South Africa has some industry-specific exposure to trade with Ukraine and Russia.

For example, wheat bought from Russia and Ukraine accounts for almost a quarter of South Africa’s total wheat imports.

On the export side, two-thirds of South African exports to Ukraine and Russia are in the fruit category.

“The economic outlook for South Africa in 2022 is certainly murkier than it was just a month ago due to this deterioration in global economic prospects,” the report states.

When taking into account the final GDP data for 2021, as well as the deteriorated global economic outlook over the past month, PwC now forecasts a real GDP growth rate of 2% for South Africa this year (from 2.3% previously) with continued downside risk.