Our South African economic growth has been weak and disappointing over the past two years, hurt by numerous domestic structural constraints and an unfavourable global economy. This was the message delivered by Nedbank senior economist Nicky Weimar at a function recently held by Nedbank Business Banking in town.
The weakness in the local economy is mainly due to a struggling mining and manufacturing sector, aggravated by a drought-stricken agricultural sector. Weimar pointed out that mining and manufacturing will probably remain under pressure in 2016 and 2017 given the slowdown in Chinese economic growth and the downturn in global commodity prices. However, she felt that although commodity prices were unlikely to bounce back rapidly in the year ahead, the worst of the slide in prices was probably over.
The local economy has been propped up by government spending over the past five years, particularly rapid growth in government employment and wages, which boosted household disposable income and spending. However, this source in growth is likely to fade in the years ahead as government tries to restore fiscal discipline and to contain the growth in government debt in an attempt to avoid a devastating downgrade to the country’s sovereign risk rating to junk status by the major global rating agencies, which are concerned about South Africa’s fiscal management.
Overall, Nedbank expects the local economy to grow by only 0,2 per cent in 2016, which is slightly lower than the IMF’s forecast of 0,6 per cent recently updated in its World Economic Outlook.
Weimar expected inflation to rise further. The deceleration in consumer inflation in March was expected to be short-lived. The main upward pressure on prices was expected to come from drought-induced spikes in food prices and pass through of the weaker rand to consumer prices.
The rand is likely to remain highly volatile in 2016. The greatest threat to the rand was a possible sovereign rating downgrade by more than one international rating agency. Weimar indicated that ratings updates are expected in June and December and the rand was expected to be very choppy over these periods.
If downgrade can be avoided, the rand is unlikely to fall at the same alarming rate as last year, when it dropped by over 25 per cent against the US dollar. Instead the rand is expected to be highly volatile, driven by changes such as global risk aversion based on news on growth in China, trends in global commodity prices and speculation around the pace of interest rate hikes in the US. Weimar argues that the Reserve Bank will probably feel more needs to be done to bring inflation under control, but the bank will proceed cautiously with further interest rate hikes given the strain on the economy.
Nedbank expects another two rate hikes of 25 basis points in July and September, taking the prime lending rate to a peak of
11 per cent.
She stressed that SA could do a lot to improve the outcome over the next three years. Progress adding new power generating capacity, steps to promote greater cooperation in the labour market and attempts to improve economic policy and foster investor and business confidence could all help improve the country’s growth prospects.
