Improved Economic Conditions – but for How Long?
• Economic Growth: Our GDP forecast for both 2016 and 2017 depend upon a number of factors, one of the most important being South Africa’s sovereign credit rating remaining in investment grade territory. Complex domestic and global forces are still affecting South African economic growth. For instance, similar to the rapidly dwindling global growth forecasts over the past months, especially by organisations such as the IMF and the World Bank, South Africa’s growth forecasts have been revised down consistently by both international and domestic organisations, a further indication of the local economy’s dependence on the global environment. Current and future dynamics in different industries of the economy will determine whether or not the country’s growth recovers, for example, recovery in the agriculture industry is highly dependent on the normalization of weather patterns, while mining will perform much better if commodity prices continue to recover. We forecast a GDP growth of 0.3% for 2016, with an acceleration in the tempo of activity during 2017.
• Business Confidence: Business confidence picked up slightly during the second quarter of 2016 from the first quarter, in sync with the increased activity that saw a boost in economic growth. Despite this, low confidence persists in the business environment, with the confidence index remaining below its critical level of 50 during the second quarter of 2016.
• Demand: The demand side of the economy also rebounded during the second quarter as real expenditure on GDP increased. Exports of goods and services increased the most, while consumption expenditure by households as well as government also went up. A trend that continues to worry, however, is that of a lack of adequate investment - gross fixed capital formation was the only major expenditure item that declined during the period. We expect low domestic demand to persist for the remainder of the year due to unfavourable economic conditions for households, tight financial conditions for government, as well as a lack of confidence amongst businesses.
• Interest rates: Inflation figures released prior to the Monetary Policy Committee’s September meeting showed the country’s inflation rate had reverted back into the Reserve Bank’s target range, even if only slightly so. This, coupled with the relatively stronger rand and an improved inflation outlook, led to the decision by the Bank not to change the country’s benchmark interest rate. Furthermore, foreign factors such as a delay in monetary policy normalization by the US Fed supported the South African Reserve Bank’s latest decision on interest rates.
• Fiscus: Government’s success in achieving fiscal consolidation as promised during the 2016 budget speech earlier in the year appears to be mixed when looking at the second quarter numbers on government deficit and debt – the government deficit as a percentage of GDP narrowed between the first and second quarter, while government debt, also as a percentage of GDP increased during this period. With a narrowing tax base resulting from low economic growth in general, we do not expect much improvement during the remainder of the year.
• Current Account: The deficit on the current account narrowed in the second quarter of 2016; this positive performance of the current account was due to an improvement in the trade balance during the quarter. The switch of the country’s trade balance from a deficit to a surplus was due to a surge in merchandise export volumes, which benefited from the lagged effect of depreciation in the exchange rate of the rand as well as subdued growth in domestic demand which resulted in a decline of merchandise import volumes.
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