Reserve Bank slashes growth outlook by 0.5%
THE SOUTH African Reserve Bank (Sarb) said yesterday that it had slashed South Africa’s gross domestic product (GDP) growth outlook for this year by 0.5 percent from 1.7 percent to 1.2 percent.
Reserve Bank Governor Lesetja Kganyago said yesterday that the domestic economic growth outlook for this year was weaker than previously anticipated in May.
Raymond Parsons of the NWU School of Business and Governance also said yesterday that the MPC’s decision to reduce growth forecast for this year to 1.2 percent was “troubling.”
Parsons said weak economic growth put a strain on the original 2018 growth targets outlined in the February 2018 Budget Speech “and on the fiscal commitments that have been made.”
Former Finance Minister Malusi Gigaba in February anticipated economic growth of 1.5 percent, saying this could reach 2.1 percent in 2020.
Sanisha Packirisamy and Herman van Papendorp of Momentum Investments said the 1.2 percent growth forecast was lower than Momentum Investments’ projection of 1.7 percent.
“The firm expects the recovery in growth from 1.3 percent in 2017 to an expected 1.7 percent in 2018 to be underpinned by firm household spend, an accumulation in inventories and a slight lift in export growth,” said Packirisamy and Van Papendorp.
The Reserve Bank yesterday kept the repo rate unchanged at 6.5 percent, but the Sarb Governor Lesetja Kganyago warned of lurking risks as the bank anticipated deterioration in the medium-term inflation outlook. Kganyago said the bank expected the annual inflation rate to average 4.8 percent in this year, down marginally from the previous 4.9 percent. Its forecast for next year and 2020 was 5.6 percent and 5.4 percent, respectively.
He pointed to several factors which posed risk to the inflation outlook, despite headline inflation falling well within the bank’s targeted range of between 3 and 6 percent. He said the bank expected inflation to peak at levels closer to the upper end of the targeted range.
Kganyago said that while the effect of the 1 percent increase in VAT appeared to be muted, the weaker rand exchange rate and the higher oil price assumptions resulted in a more elevated inflation trajectory.
In light of the deteriorating inflation outlook, he warned of possible rate hikes in future.
“With risks and uncertainties at higher levels, the MPC will continue to be vigilant and will not hesitate to act should there be second-round effects that take us significantly away from the midpoint of the inflation target range,” said Kganyago.
Mamello Matikinca, FNB Chief Economist, said the Bank saw upside risks to the inflation outlook, particularly as escalating tensions around the US imposition of trade tariffs hold the potential to precipitate further emerging market currency weakness.
NKC African Economics senior economist Elize Kruger said real interest rates had started to level off as inflation has increased slightly higher in the last few months, due to, among others, the VAT rate increase and higher fuel prices.