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2016: A lost year?

Can the Sarb afford to hike rates this week?

JOHANNESBURG – Since 2011, South Africa’s economic growth forecasts have almost consistently suggested that GDP growth would accelerate one year into the future, only for it to be revised downwards a few months later.

Gina Schoeman, economist at Citi, says global headwinds – much of it related to the slowdown in China – have been a drag on the country’s growth.

But while South Africa’s challenges as an emerging market and commodity exporter have weighed on expansion, it has also lacked structural reform.

“The lack of that structural reform unfortunately creates huge inefficiencies internally which deducts further from GDP growth,” Schoeman says.

In its Medium-Term Budget Policy Statement (MTBPS), National Treasury provided some context to the issue, when it indicated that electricity shortages deducted one percentage point from the country’s GDP growth in 2014, while strikes subtracted another 0.4 percentage points. The economy grew by 1.5% last year.

“So technically what Treasury is telling you is that if not for electricity problems and labour problems, this economy would have grown just shy of 3%,” she says.

In its 2011 Budget, National Treasury expected the economy to grow by 4.5% in 2014.

Schoeman says even without electricity and labour issues, the economic growth outlook for South Africa is particularly difficult to forecast because stakeholders are trying to accurately predict the global situation. Electricity supply and labour challenges add another level of complexity to the equation.

Citi expects GDP growth of 1.3% this year – lower than the Reserve Bank and National Treasury’s forecast of 1.5% and also lower than the consensus forecast of about 1.7%.

The year ahead

Schoeman expects GDP growth of 1.2% next year – and for the slowdown to continue.

While policy makers and consensus forecasts generally expect the economy to pick up next year, the International Monetary Fund (IMF) also anticipates a deceleration from 1.4% this year to 1.3% in 2016.

Schoeman says this is due to the expectation that the drivers of economic growth will take even more strain next year.

If this scenario was to materialise 2016 will end up being “a lost year”.

“It is too early for the structural reform plans of government to kick in significantly enough to really boost potential growth and at the same time the headwinds you are facing globally have simply got greater.”

Of particular concern is the fact that the productive side of the economy – mining and manufacturing in particular – remains under pressure, while the private sector investment growth rate has almost continually slowed against a backdrop of weak business confidence.

Schoeman says the longer this situation persists, the more difficult the employment backdrop will be. Job losses in sectors like agriculture, mining and manufacturing are quite likely.

Where it leaves the Sarb

Schoeman says the IMF’s expectation of slower economic growth in 2016, will be of concern to the South African Reserve Bank’s Monetary Policy Committee (MPC) when it meets this week.

“Not to say that they weren’t concerned before. They have been tolerating high inflation for quite some time.”

The MPC will announce its decision on interest rates on Thursday, with the US Federal Reserve’s decision on rates scheduled for December.

Schoeman says interest rates in South Africa are very low in real terms – some would argue too low – and will have to rise at some point. The question is whether now is the appropriate time to introduce tighter monetary policy.

Citi’s inflation forecasts only point to a temporary breach of the inflation target band in 2016 and during the first half of 2017.

Schoeman says if the Sarb had to adopt a GDP growth outlook similar to Citi’s, its inflation profile would have downside risk attached to it and it would not have to hike rates.

However there are significant risks to the outlook. This is especially true for the MPC meeting in January, when there will be clarity on the Fed’s decision as well as its impact on the currency (and the inflation outlook).

Schoeman says while Citi’s baseline view is not that the MPC will hike rates in January, the January MPC meeting has got a significant amount of risk attached to it insofar as another 25 basis point rate hike is concerned.

To some degree this is also true for the decision on Thursday, but she expects the Sarb to keep rates on hold, especially against the backdrop of weak economic growth.

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