SA’s economic recovery stunted

South Africa entered 2017 with quiet optimism about the economy. After the very weak performance in 2016, there was signs that growth could recover this year.

In January, President Jacob Zuma even went so far as to predict GDP growth of 2.9% for the country in 2017. Most economists agreed that this was overly optimistic, but were nevertheless projecting positive growth rates of between 1% and 2%. In his February budget speech, the then minister of finance Pravin Gordhan said that National Treasury expected growth of 1.3%.

Stronger commodity prices, lower inflation, and higher agricultural production due to good rains were all in South Africa’s favour. Although business confidence remained depressed, there were enough positives to expect that the economy would begin to stage a moderate recovery.

Economist Dr Roelof Botha was among the more optimistic:

The South African Reserve Bank’s composite leading business cycle indicator had also begun to trend sharply upwards. The latest data was released in March this year and shows that, up to January, the indicator had improved for six months in a row and reached levels last seen in 2014.

This optimism has, however, been severely dented in the last few weeks. The cabinet reshuffle that saw the dismissal of Pravin Gordhan as finance minister and the subsequent sovereign debt downgrades from two ratings agencies have forced economists to revisit their predictions for South Africa’s growth.

“We see South Africa in a cycle now of reinforcing the status quo, a path it is already one of low growth (negative to zero per capital growth), rising inequality, rising unemployment, high rent extraction, eroding institutions and slowly rising debt to GDP,” Nomura wrote in a report on Wednesday. “It is reducing the chances of upside and opening up some increased probability of downside risks of the path South Africa takes from here.”

The bank said that it had revised its GDP growth forecast for the year sharply downwards from 1.1% to 0.2%. Although it did not formally forecast a recession, it added that there was a chance of a technical recession in the second half of the year.

Nomura added that further credit downgrades could force the South African Reserve Bank to hike rates in 2017. It expects the rand to be trading at levels of around R15.50 to the dollar by the end of the year.

A number of other economists surveyed by Moneyweb have also revised their growth forecasts downwards. Botha said that even though he still saw positives in the economy, the latest events had forced him to revise his expectations for GDP growth from just over 2% to around 1.2%.

While he believed that the primary sectors of agricultural and metals and mining would still contribute positively, he said that manufacturing will be “the biggest loser”.

Elna Moolman from the Macquarie Group said that while she hasn’t yet changed her forecast, the risks are certainly biased downwards.

“We still forecast 1.4% for 2017,” she said. “The rebound from 2016 is expected to come mainly from the post-drought agricultural rebound and some relief to consumers from moderating inflation (while employment and nominal wage settlements trend sideways). Our main concern is that the downside risks to private sector fixed investment, about which we have already been cautious, have increased further following the credit rating downgrades and cabinet reshuffle.”

Investec Asset Management’s economist Nazmeera Moola said that she is now forecasting growth of 1%, down from 1.6%. This could however still slip further. 

“At this stage, all we have factored in is the decline in private investment and lower durable goods consumer purchases,” she noted. “We have not phased in second-round effects, so the forecast could well be adjusted lower.”

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