South Africa’s Economic Woes Continue into the last quarter of 2015

SOUTH AFRICA - Forecast 31 Mar 2016 by Iraj Abedian

South Africa’s Growth: South Africa’s economic woes continued into the last quarter of 2015, with economic growth slowing down further during this period. What’s more, GDP growth also decelerated for 2015 as whole, placing GDP growth below the 2% growth that had been projected at the beginning of 2015. Headwinds facing the South African economy, both external and internal, intensified over the fourth quarter and continued well into the first months of 2016. For this reason, we forecast no pickup in the GDP growth during the first quarter of 2016, nor for the rest of 2016. What's more, much of South Africa’s recovery depends on the performance of the global economy, which itself is under much strain.
Demand: Overall domestic demand remains muted, with all three main expenditure indicators; government, household and (most worrying) gross fixed capital formation on a downward trend, and all remaining at very low levels during the fourth quarter of 2015. Exports demand has taken a hit as the global economy struggles to recover to its pre-crisis growth rate. Exports to China, South Africa’s biggest trading partner, have also deteriorated significantly. We expect South Africa’s exports to improve slightly as the global economy is expected to gradually pick up (and if electricity supply remains stable as Eskom has undertaken to avoid power cuts at all costs) , but we expect domestic demand to remain muted under conditions of low growth and rising interest rates.
Business Conditions: Business confidence remained subdued during the fourth quarter of 2015, and the cumulative fall in business confidence over the year 2015 brought the index to a five year low. Additionally, in line with the dismal performance of the manufacturing sector, which contracted for three quarters of 2015, the Purchasing Managers’ Index (PMI) remained under the neutral 50 point mark during all of the three months of 2015’s last quarter. Economic activity in the country, particularly the agricultural sector, has been further hampered by the severe drought that hit South Africa.
The Consumer: The South African consumer continues to be hammered by the many negative dynamics currently present in the economy. Household consumption has been muted as households are under pressure from increasing prices, particularly food prices, which has led to accelerating inflation, increasing interest rates coupled with an already high household debt. Although unemployment decreased slightly during the fourth quarter of 2015, it still remains very high with millions of South Africans unable to find employment, and we expect it to remain at around 25% during 2016 due to prevailing unfavourable business conditions. Overall consumer confidence remains very low and we do not expect it to pick up in the short or medium term.
Inflation & Interest Rates: Inflation is currently very high and in February 2016 it reached its highest level since May 2009, which is well above the upper inflation target band of 6% of the South African Reserve Bank. Substantial inflationary pressures emanating mainly from escalating food prices, which in turn have been propelled by the drought that is still affecting the country, together with the weak exchange rate, remain high. As the South African Reserve Bank has already hiked the repurchase rate by 75 basis points this year alone amidst low economic growth, we expect a pause in this normalisation cycle during the MPC’s next meeting in May 2016.
Fiscal Space: South Africa’s fiscal space weakened further during 2015, with the fiscal balance in the negative and the debt-to-GDP ratio remaining high. The situation that South Africa finds itself in, in terms of weak fiscal space, is mostly the result of subdued economic growth, but also points to the failure of the country’s fiscal authority to take advantage of the previous commodity price boom to build up fiscal buffers. The government has made known its intentions for fiscal consolidation (also an effort to appease the credit rating agencies), but it remains to be seen if it will succeed amidst low economic growth, and at the same time an economy that clearly cannot withstand a contractionary fiscal policy.
Current Account: External headwinds facing South Africa’s economy include the lacklustre global economy, which has resulted in South Africa’s exports to the rest of the world declining drastically over the past years. This, combined with the country’s economic structural blockages that have also prevented the country’s export sector from taking advantage of the weak exchange rate, is likely to result in the current account not improving in 2016.

Now read on...

Register to sample a report