The South African Economy in Dire Need of a Confidence Boost
• Economic Growth: On the whole, the South African economy appears to have been stuck in a down phase since 2012 (i.e. when not counting the recession period following the financial crisis). The economy contracted during the first quarter of 2016, and we expect overall growth for 2016 to not exceed 0.3%. The state of local politics as well as governance issues poses a major threat to economic growth, with the resultant uncertainty dampening confidence and therefore investment. Headwinds from the rest of the world also continue to face the country, and these include low commodity prices, which have increased South Africa’s fiscal vulnerabilities and inflation among others.
• Confidence: A lack of consumer confidence is mainly caused by the muted economic growth that is compromising growth in GDP per capita, high unemployment, and the erosion of spending power by high inflation rates as well as escalating interest rates amidst households’ high debt to disposable income ratio. Consequently, local demand has been subdued, resulting in a further drop in business confidence.
• Inflation and Interest Rates: Inflation remains above the Reserve Bank’s upper target band of 6% and we therefore expect that the Bank will continue on its policy tightening cycle in order to contain it. The slow economic growth is however bound to result in the Monetary Policy Committee’s reluctance to increase the repo rate too quickly in a short space of time. We expect inflation to remain elevated due to the still low commodity prices and weak rand, high food prices as a result of the ongoing drought and the rebounding price of oil that is resulting in rising fuel prices.
• National Fiscus: Government expenditure continues to exceed government revenue despite efforts of fiscal consolidation by government, resulting in an unrelenting fiscal deficit. One of the main reasons for this is low economic growth that is making it difficult for the government to collect adequate revenue. Low commodity prices have also been a major factor in the current state of South Africa’s fiscal vulnerability, pointing to the need to increase fiscal buffers during periods of commodity booms as commodities make up a large share of South Africa’s exports.
• Twin Deficits: The prevailing twin deficits are making South Africa more vulnerable to external shocks, which have become numerous in a global economy plagued by low growth and other malice such as muted trade between countries. For example, as long as these remain in place, the country’s exchange rate will remain susceptible to frequent bouts of high volatility.
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