The ‘R’ word – get used to hearing it

Despite a depressing growth outlook for 2016, in which the International Monetary Fund (IMF) has revised SA’s growth forecast down from 1.3% to 0.7%, the South African Reserve Bank (Sarb), last Thursday, raised the repo rate by 50 basis points.

This will put further pressure on business and South African consumers, who are being asked to tighten their belts further in an environment where inflation is not being driven by demand-side factors.

Whether the Sarb’s move will contain inflation will be known in 14 to 18 months’ time, according to Reserve Bank governor Lesetja Kganyago. In the meantime, what seems certain is that South Africa is all the more likely to enter a recession in 2016. In true Blue Monday fashion Moneyweb spoke to five economists to get their views on the likelihood of a contraction in the coming year.

Loane Sharp, director of economics at Prophet Analytics: “The South African economy will contract by 1.5% in 2016. We have a ludicrous monetary policy where, going into the most difficult time in the world economy since 1945, the Sarb uniquely feels that interest rates should rise.

Every year the exchange rate deteriorates further and it does so because our interest rate policy chronically undermines the growth that is so central. Over the last 20 years, more than 85% of the pattern of inflation is connected to periodic crises in the exchange rate. The idea that inflation can be reduced by people tightening their belts will lead to political disaster. There are no more holes in the belt. The economy needs to grow more than 4% a year to attract scarce international capital and create jobs on a meaningful scale. The concept of an independent central bank is a fallacy. Independent from what, reality?”

Elna Moolman, senior economist at Macquarie Equities: “At this stage, our baseline view is that we’re not going to go into a recession. Of course there is downward risk from the impact of the drought, the general outlook of the mining sector is quite bleak, and we are concerned that monetary policy will put increasing pressure on domestic demand.

However, there is perhaps still some counteracting risk from net exports. Given how weak the rand and domestic demand is, you would expect significant pressure on imports, while at the same time getting some support for exports.”

Mike Schüssler, chief economist at Economists.co.za: “We’re going to face a recession. That decline will probably be less than 1%. It’s impossible to say for certain whether it will happen, but I’ll say there’s about a 75% chance. South Africa does not normally escape recession when commodity prices fall, and we have to face the fact that other commodity-producing emerging markets like Brazil and Russia are in deep recession. We’re not going to have anything quite as severe as those two countries because we are a bit more diversified but we’ve had interest rate hikes in a low growth environment, so it’s difficult to see how we could avoid a recession.

Annabel Bishop, chief economist at Investec: “Our forecasts do not point to a recession this year. However, the extreme hawkish position that the Sarb has adopted in pursuit of achieving financial stability is out of kilter with both global monetary policy, and with economic conditions in SA, contributing to the slowdown in economic growth, as well as depressed business and consumer confidence and rising private sector unemployment…

CPI inflation reached 8.1% y/y in 2009, while the economy fell into recession, and monetary policy was eased substantially, with significant interest rate cuts. SA narrowly avoided recession last year, and technical adjustments to the data to reduce the residual will not lift growth this year. Industrial production (mining, manufacturing and electricity production) was in recession most of last year and this will continue into 2016. The drought has pushed the agriculture sector into recession, while the consumer spend sectors are seeing growth slow markedly.”

Gina Schoeman, Citi Economist: “It’s not easy to put a probability on the chance of a recession, but at 0.3% GDP growth as our baseline forecast it is extremely likely. There are various shocks that could see the SA economy achieve a negative annual growth rate, including a strike in any of the major wage negotiations taking place this year, with the automotive sector being the most concerning. A weaker currency or higher oil price or higher than expected electricity tariffs, which are all factors that could drive CPI higher than we expect, would erode the mere 0.1% in household consumption growth we forecast. Private sector investment could pull back more aggressively than the 2.2% contraction we estimate as sentiment matters a lot, while a far quicker slowdown in China would erode export volumes further.”