Economists see South Africa’s growth at 1.7% in 2018

South Africa’s GDP growth for 2018 is forecast to reach 1.7% according to a survey of 24 economists conducted by Reuters.

Having grown by 3.1% in the fourth quarter of 2017, the country’s economy wobbled in the first quarter of 2018, shrinking by 2.2% quarter-on-quarter.

Agriculture, mining and manufacturing were the main contributors to the slowdown, with the electricity, construction and trade industries also recording negative growth, said StatsSA.

The 2.2% fall marked the largest quarter-on-quarter decline since the first quarter of 2009. In that quarter, the economy contracted by 6.1%.

Economists and ratings agencies have cast down on the country’s ability to meaningfully grow the economy despite signs of improvement in governance following the appointment of Cyril Ramaphosa  as president of the nation.

Concerns remain over the whigh unemployment rate, while a US-China trade war is having a meaningful impact on emerging market currencies, currently led by the rand, which has fallen to seven-month lows this week.

“The rest of the world is doing very, very well, so on the export side of things we will actually start doing better,” Busisiwe Radebe, an economist at Nedbank told Reuters. “That is why you see that lift that we are expecting.”

Miyelani Maluleke, an economist at Absa Capital, said domestic demand still had enough momentum to deliver GDP growth of 1.7% in 2018. “There were some one-off factors that contributed to the first-quarter GDP contraction and the effect of those will likely wear off,” Maluleke said.

Citing Reserve Bank deputy governor Kuben Naidoo, Bloomberg reported that the rand’s plunge to the weakest in almost seven months against the dollar may push up South African inflation and require interest-rate increases.

While the South African Reserve Bank doesn’t target a specific level of the rand, it responds to second-round effects on prices from currency weakness, Naidoo said in an interview with Bloomberg TV in Sintra, Portugal, on Tuesday.

“If we do think there is a risk of second-round effects, we will have to act,” he said. Inflation was 4.5 % in April, in the middle of the central bank’s target range. “But if it rises and if it’s forecast for rise, we will have to act.”

The Reserve Bank held its key rate at 6.5% last month after cutting in July and March, citing the cost of oil and wage increases as risks to the outlook for the pace of price increases. It sees inflation staying in its target range of 3% to 6% until at least the end of 2020.

A government report on Wednesday will likely show the rate increased to 4.6% in May, according to the median estimate in a Bloomberg survey.

After strengthening to a three-year high against the dollar following Cyril Ramaphosa’s ascent to the presidency, the rand has wiped out all those gains and at R13.7231 per dollar at 7:13 a.m. on Wednesday, it’s at levels last seen in early December.

That adds to price-pressure risks, with inflation expectations – as measured by the five-year breakeven rate – now at the highest level in seven months.

The effect of the rand on prices will depend on how long it remains weak, Naidoo said.

“If you have much weaker currency persisting for a long time, it will have a much greater likelihood of causing inflation,” he said. “If the currency is back to 12.50 in a month’s time, it will have a much lower chance of causing inflation.”

Read: Reserve Bank deputy governor speaks on rand weakness and a possible interest rate hike

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Economists see South Africa’s growth at 1.7% in 2018