SA’s economic forecasts keep getting dimmer

Last week the Reserve Bank’s Monetary Policy Committee (MPC) announced that it had revised its GDP growth forecast to just 0.5% for this year. This was halved from the 1% it had expected in May, and nearly 60% below the 1.2% GDP growth it had forecast at its meeting in March.

Its outlook for the next two years was lowered as well. In March the MPC forecast 1.7% growth in 2018 and 2.0% for 2019. Last week, it cut its projections to 1.2% for next year and 1.5% the year thereafter.

Sarb GDP forecast revisions (%)

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Sarb trend growth revisions (% y/y)

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Although the scale of the cuts to the MPC’s growth forecasts may have been unexpected, nobody would have been surprised that the Reserve Bank’s view on the economy has dimmed. It is clear that all is not well in South Africa.

“In its question and answer session following the reading of the statement, the Sarb emphasised that the SA growth problem is not cyclical in nature and an uncertain direction on policy continues to exacerbate the weak state of the economy,” Momentum Investments economist Sanisha Packirisamy said after the announcement.

This is not really surprising. President Zuma has tried to sell the story that South Africa’s growth problems are linked to a weak global economy and cyclical issues, but this is a poor attempt at throwing up a smokescreen.

In reality, South Africa should have been benefiting from what’s been happening in the world.

“The global environment has been broadly supportive of South Africa’s economy over the past year through firmer commodity prices and fairly strong inflows into the local bond market,” noted Rian le Roux, the chief economist at the Old Mutual Investment Group. “These have been instrumental in the unexpected firmness of the rand.”

It is patently obvious that the local economy is in a sorry state because of poor governance, self-serving leadership, and policies that are at worst deliberately destructive and at best terribly conceived. The revised Mining Charter and the proposal by the Minister of Mineral Resources, Mosebenzi Zwane, to restrict mining rights being the most recent example.

This is what has led economists across the board to lower their expectations for growth in the short term. At the start of the year there was talk of green shoots and improving sentiment, but the dismissal of the Minister of Finance Pravin Gordhan, growing revelations of the scale of state capture and of the mismanagement of state-owned enterprises and muddled government policy have made those impossible to sustain.

“Depressed confidence has been a key underlying cause of a weaker economy,” said Packirisamy. “It has suppressed spend on bigger ticket items by consumers and delayed fixed investment spend by businesses.”

The Old Mutual Investment Group has lowered its growth forecast for this year from 1.3% in January to just 0.8%. And Le Roux believes there is still risk that it could be lower.

“In the absence of a material recovery in business, investor and consumer confidence, South Africa is at risk of getting trapped in a protracted period of weak economic growth and further social and fiscal pressures,” he explained. “With the economy already in recession, concerns over the direction of economic policy, little scope for support from monetary or fiscal policy, and global conditions that are set to become more difficult as global central banks start to roll back policy support, a broad-based revival in deeply depressed confidence is essentially the only source of lasting improvement.”

Looking further ahead, economists views on how well the economy is likely to perform next year have also been lowered.

Momentum Investments has dropped its GDP growth forecast for 2018 to 1.1%. Stanlib economist Kevin Lings expects 2018 to be even worse than this year, and is projecting just 0.5% growth.

Sanlam Investment Management’s (SIM) real GDP growth forecast for 2018 at the start of the year was 1.75%. It has since been revised down to 1.25%.

“The downward revision to the forecast, to a significant extent, reflects a weaker outlook for private sector investment,” said Arthur Kamp, SIM investment economist. “Investment usually gains momentum with a lag to the general economic cycle, but, given the depressed state of business confidence, it seems unlikely there can be any meaningful lift in investment spending.”

Economist at the Macquarie Group, Elna Moolman, was predicting GDP growth for 2018 of 2.0% at the start of the year. Her forecast has however been cut to 1.2%.

“A key risk to the 2018 growth forecasts is the leadership and policy decisions that will be made at the ANC conference at the end of the year,” Moolman noted. “At this stage, policy uncertainty is exceptionally high, and after the December conference there should at least be some clearer indication of the general policy direction that the ANC will follow for the next couple of years.”

In the very near term, however, it’s almost impossible to know what might happen.

“August sees Moody’s making its next ratings review on SA and this will be followed by the announcement of the medium-term budget in October,” said Packirisamy. “Finally, S&P and Fitch are set to review SA in late November and early December, respectively. With event risk remaining high, the economic outlook remains uncertain.”

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