Will economic stagnation persist in South Africa?

South African Reserve Bank deputy governor Daniel Mminele on Monday warned of continued slow growth for the country’s economy.

“We may not be in a recession, but it is quite doubtful that the 2.5% momentum of the second quarter can be sustained,” he said in the wake of a very bleak outlook delivered by finance minister Malusi Gigaba in his maiden budget performance in Parliament last Wednesday.

“It seems pretty certain that South Africa is presently mired in very low growth. Following an increase of only 0.3% in GDP last year, our models project a meagre expansion of  just 0.6% in 2017. These numbers continue to fall short of the domestic population growth of around 1.5%.

“This means that, in per-capita terms, GDP is declining and is likely to drop back this year to levels last seen in 2011. Effectively, real GDP per capita will only have grown by 4% overall over the past 10 years, compared with a growth of 20% over the previous 10 years,” Mminele said.

He said that moving forward, the most likely scenario is for ‘a modest recovery’. “There are presently some grounds for very prudent optimism for the next year or two,” he said, noting that the external economic environment has improved.

Last month, the IMF again revised upwards its forecast for world growth in both 2017 and 2018, by 0.1 percentage points in each case, to 3.6% and 3.7% respectively, up from 3.2% last year.

“Such upward revisions mark a welcome break from the pattern of earlier years, when forecasters regularly pushed back the timing and the scale of the global recovery. Furthermore, this recovery is relatively broad-based, both geographically and a cross sectors, and it is not generating the kind of price pressures that would prompt the major central banks to aggressively tighten monetary policy and, as such, curtail that recovery.”

Closer to home, Mminele said that the decline in inflation over the past year has provided some breathing space to the consumer, allowing some gains in real disposable income despite net job losses.

Equally, the decline in the current account deficit, to 2.2% of GDP on average in the first half of the year from as high as 5.9% of GDP in 2013, is helping to shelter domestic financial markets from external or local shocks.

“This explains, in part, why the rand and domestic bonds have not shown a strong or durable reaction, this year, to adverse political or policy news,” the deputy said.

In recent months, some domestic high-frequency data have shown signs of improvement. “Following a downward trend lasting more than three years, new vehicle sales, expressed in seasonally adjusted terms, rose by 10% in September from an April low.

“Manufacturing production, which had stagnated for the past five years, increased in both July and August to its highest levels in more than a year. The rebound in the mining sector has been even more pronounced.

“It would therefore appear that both sectors will contribute positively to GDP growth in the third quarter of this year,” Mminele said.

The RMB/BER business confidence index, while still well below the neutral 50 mark, rose off eight-year lows in the previous quarter, the deputy governor added.

However, he warned that all this is no cause for premature celebration as many factors still limit the room for a meaningful improvement in South African economic growth. Confidence, he said, remains highly vulnerable to upcoming political events given their potential implications for important government policies; it also remains vulnerable to the risk of further sovereign credit rating downgrades.

A further rise in the oil price could boost inflation and undermine the terms of trade. And the extent of the impact that the normalization of monetary policies in the advanced economies could have on emerging-market assets, including the rand and domestic securities, is still unclear, Mminele said.

“Even in a relatively favourable scenario–where confidence gradually improves, inflation remains moderate,and the output gap gradually closes–structural factors are likely to limit the scope for a meaningful growth pickup.

“Productivity performance remains weak, with an average annual gain of only 1.2% in the past five years,” he said.

He said that the shortages of skilled labour are likely to remain acute for an extended period of time even if educational outcomes improve. Job-searching costs are high, making it that much more difficult for low-skilled people to find employment. And the relatively high concentration in many sectors, together with elevated regulation, results in barriers to entry for new firms.

“Consequently, even with the gradual removal of infrastructure bottlenecks –for example, as more power supply comes on stream –it is difficult to envisage much of a pickup in potential growth in the next two years or so.

“For these reasons, the SARB projects only a moderate acceleration in actual real GDP growth, from 0.6% this year to 1.2% in 2018 and 1.5% in 2019.”

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