Bank sees risk in global slowdown

Restoring confidence the cheapest form of stimulus, says Kganyago

Risks to the SA Reserve Bank’s growth forecasts are on the downside because of uncertainty over global growth, Bank governor Lesetja Kganyago warned on Wednesday.

The Bank projects the economy will grow 0.6% this year, rising to 1.8% in 2020 and 2% in 2021, with global growth of 3.4% forecast for 2019, but it is expected to slow thereafter.

Kganyago told members of parliament’s finance committee that global growth is unlikely to become more supportive of domestic growth because of US-China trade tensions and the negative impact of Brexit. Geopolitical tensions are affecting commodity prices, he said, with lower global demand resulting in lower exports.

“We cannot be saved by the global economy as it is actually slowing down,” Kganyago said. “With trade tensions globally not abating, we see the risks to global growth on the downside. The timid rebound of global trade at the beginning of the year was not sustained.”

While domestically there was a rebound in real annual growth in GDP in the second quarter of 3.1% after the contraction of more than 3% in the first quarter, domestic growth remains volatile.

Economic activity remains weak, with insufficient investment and job creation.

“Potential growth, an outcome of investment, both physical and human, remains very low. We need to lay the basis for sustained growth if we are going to make any impact on the jobs situation,” Kganyago noted.

To get the domestic environment right, he said, requires ensuring a sustainable fiscal framework and a commitment to macro-stability.

Reducing supply-side disruptions, such as load-shedding and strikes, and improving policy certainty across several domains are a basis for driving business confidence.

Low business confidence is hitting investment and reducing growth and will have to be restored to stimulate economic growth, he said, adding that flows of foreign direct investment into SA are low compared to its emerging-market peers.

Kganyago noted that “restoring confidence is the cheapest form of stimulus” and that he and President Cyril Ramaphosa are at one about the need to strengthen business confidence.

Despite having called for structural reforms of the economy, the Bank played no role in the formulation of the Treasury’s economic plan. Kganyago said this is because it is the preserve of the government.

He said the fiscal environment has deteriorated, leading to rising bond yields and undermining business and consumer confidence. Long-term borrowing costs are still higher than SA’s emerging-market peers.

Inflation remains in the target range with risks being relatively balanced, though there are exceptions: food prices and rand risk related to credit ratings.

Inflation expectations have moderated but are above the 4.5% midpoint of the inflation target range.

The Bank has forecast for inflation for 2019 of 4.4%, 5.1% for 2020, and 4.6% in 2021.