SA economy has already returned to positive growth: economist
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.
This is according to Old Mutual Investment Group economic strategist, Rian Le Roux, who pointed to the IMF’s recent call for government to, as a short term priority, reassure business people and consumers over the future direction of policies.
Le Roux says that 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 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.
Presenting at Old Mutual Investment Group’s Quarterly investment briefing on Wednesday, Le Roux said: “Our GDP forecast has been cut to a sickly 0.8% for the year, which is far below what is required and presents yet another year of disappointment.”
As such, Le Roux said that the economy is at risk of an extended period of sub-potential growth, with slow growth in recent years already to blame for rising macro-economic vulnerabilities and ratings downgrades.
“Our fiscal consolidation path faces significant risk should the economy indeed fail to recover materially over the next few years and, added to this, is the risk of losing our investment grade on local bonds, which could cause a sharp weakening of the rand and force interest rates higher.”
The economist did however highlight that improvements are under way in a few areas. He noted that the current account deficit has narrowed more than was generally expected and is likely to remain relatively small this year, while inflation continues to surprise on the downside, with the year-end figure expected at around 5%.
“An interest rate cut before year-end is also still possible, again provided that the rand doesn’t slump significantly before then,” he said.
“Lower inflation and moderate interest rate relief will lend some welcome support to financially constrained consumers. In addition, high frequency data on the real economy suggests that the economy has already returned to positive growth in the second quarter,” Le Roux said.
Old Mutual said that 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, until recently.
“These have been instrumental in the unexpected firmness of the rand, although recent more hawkish comments by a number of global central banks have negatively affected a number of emerging market currencies, prime of which was the rand,” said Le Roux.
“Looking forward, the intended global liquidity reduction by a number of central banks, primarily the US Fed, could reduce flows to Emerging Markets, so creating more challenging conditions.
“Renewed commodity price weakness would pose a further potential risk. The global economy remains on solid footing for now, but the risks associated with the coming stimulus roll-back remain considerable.”
Le Roux stressed that with global support likely to fade compared to the past year or so, the urgency to rebuild confidence in the South African economy to foster faster economic growth, investment and critical job creation, has become all the more urgent.
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