Improved economic outlook for SA, with caveats – Absa

With an improved economic outlook for SA, it looks as if there is light at the end of the tunnel for South Africa, but the risk of a spill-over shock if global inflation surges cannot be discounted completely.

According to Absa’s South Africa Q2 21 Quarterly Perspectives report, economists have raised their 2021 GDP growth forecast from 3.1% to 3.8%, but believe a big hit to household disposable income in 2021 will limit the recovery in consumption spending.

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Challenges

Not all the predictions in the report are good news:

• Fixed investment is likely to stay weak amid still-depressed business confidence.
• Medium-term GDP forecasts from 2022 onwards remain unchanged at about 2%.
• Load shedding and Covid-19 will likely limit South Africa’s near-term recovery. While there is no sign of a third wave yet, it could still happen, while Eskom’s maintenance efforts have not significantly stabilised its generating fleet.
• Inflationary pressures remain subdued with little broad demand-pull momentum, although a few cost-push drivers could push headline CPI higher in the near term.
• Inflation is likely to be mostly in the bottom half of the target range.
• Another current account surplus is forecast in 2021, helped by export volume growth and terms of trade.
• A markedly stronger exchange rate forecast, with the rand expected to be R14.25/USD by mid-year and R15.25/USD by year-end.
• Rates will stay low for long; with a large output gap, subdued credit growth and quiescent inflation, they believe the Reserve Bank monetary policy committee  will leave the repo rate on hold at 3.5% until March 2022.
• Fiscal policy remains challenging despite the better than expected tax collections, but there is a risk the government’s plans to freeze public sector wages will not succeed.
• Debt stabilisation is still possible
• Further credit rating downgrades remain more likely than not, but the risk in this direction has lessened.
• A main budget deficit this year of R437bn, or 7.9% of GDP is forecast.
• While there has been some structural reform progress, overall progress is likely to be much slower than envisaged in the Economic Reconstruction and Recovery Plan.
• The factional standoff in the ANC seems to be slowly resolving in President Cyril Ramaphosa’s direction, but the party still has big economic ideological divides.
• Uncertainty is high.

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