it can affect is demand, which can be applied to reduce the volatility of output. more technically, as long as prices are fairly stable, changing a nominal variable such as interest rates can temporarily affect real variables, including quantities of goods and services. this is useful when demand is too weak, during downswing phases of business cycles. where a central bank aims for a growth rate which requires more output than an economy can produce, however, the results are troublesome. for a small open economy such as south africa, this typically means that we experience unsustainable imports, currency depreciation and rising inflation. in modern central banking practice, we formalise these intuitions using a concept called ‘ potential growth ’, which is an estimate of the amount an economy can produce at full capacity. to the extent an economy is not at potential, we say it has an output gap. if output is below potential, then the output gap is negative ; if it is above potential, the gap is positive. for every mpc meeting, the forecast team prepares estimates of south africa ’ s potential growth and the output gap. they are unobservable concepts and must be estimates using imperfect techniques, which makes them uncertain. so, when i look at these figures, and how they shape the forecast and the policy advice, i do not quibble about the exact numbers, but i think about what kind of problem these numbers describe, how this information squares with the other information available, and how policy should then respond. as of the january 2023 mpc forecast round, those numbers told an extraordinary story. i have already mentioned that our growth projections are very low, but our potential growth estimates are even lower. the team estimates potential growth at 0 % this year, then 0. 6 % in 2024 and 1 % in 2025. because the economy performed better than expected last year, and because expected growth is above potential, the forecast now sees a small positive output gap developing this year. in other words, in the interpretation of our quarterly projection model ( qpm ), we have an economy operating modestly above its potential. and this, in turn, supports policy advice to raise rates not only because inflation is above target, but also because growth is too high. in assessing this forecast story, i am struck by two plausible but competing interpretations. the first interpretation is that potential growth must be 0 %, or worse, given the scale of supply - side dysfunction in the economy.

after all, isn ’ t it hard enough for people just to achieve the output they delivered last year, let alone produce more? we know electricity shortages have intensified ; we expect to have 250 days of load - shedding this year, from 157 days last year and 48 days in 2021. on top of that, the freight rail system has, for the most part, not been functioning optimally, removing another pillar of the economy ’ s productive potential. there are many other constraints in the economy that also suppress potential growth. for our forecast team, these are facts that must be faced squarely, and it ’ s better to accept them up front than gradually mark down the projections as disappointing data come in. of course, it is reasonable to expect that south africans will find ways to cope with these challenges, and that there will be policy steps to address them with time. for this reason, potential growth rises over the forecast period, reaching 1 % in 2025. but the narrative for this year is that the economy does not have the supply - side capacity to produce more than it did last year. at the same time ‒ and this is the second interpretation ‒ is it possible for the economy to be at full potential when unemployment is over 30 %? the quarterly employment survey recorded 10. 57 million formal jobs at the end of 2019, against 9. 98 million now. 9 were all those workers unproductive, so that recovering those roughly half - amillion jobs would add nothing to output? are all sectors in the economy at full capacity? can potential realistically be at zero? these competing views are not wholly incompatible. they both capture important truths. the main point of the comparison is to illustrate how the economy is short of some inputs, like electricity, but there is slack in other areas, such as employment. in these conditions, what the mpc is trying to gauge is the space to satisfy additional demand and follow through on what that means for monetary policy. the difficult part, for the mpc, is judging how much we can do to help on the demand side when the supply side of the economy is in such a perilous state. in common with many other central banks, we are flexible inflation targeters. we aim to achieve our inflation targets while also considering growth ; if inflation is above target but there is a negative output gap, then we can tolerate a somewhat slower disinflation path for the sake of supporting demand. no one really targets inflation exclusively,