Stability is needed to beat low growth trap

GDP data released during the week painted a worrying picture of the economy. While the underperformance in the first quarter was anticipated, the extent of the slowdown was surprising, suggesting that 2017 may be another difficult year for South Africa.

GDP figures showed that South Africa entered a technical recession, challenging our expectations of 0.7% growth for the year and also suggesting that the downturn in the business cycle which started in 2013 may not yet be behind us.

In its assessment of South Africa the World Bank revised its growth expectations downward by half a percentage point and now expects the economy to expand by 0.6%.

The broad-based contraction in the secondary and tertiary sectors confirmed that domestic demand is weak. While the improvement in the primary sector limited the rate of contraction — excluding the primary sector GDP contracted by around 2% — it was not enough to avert a recession.

Of concern is that the numbers presented by Stats SA are backward looking and do not take into account the anticipated hit to confidence that followed the cabinet reshuffle and subsequent downgrade.

Nonetheless, lack of demand will most likely be reflected in the inflation numbers in the months ahead and possibly lead to further downward adjustments of inflation forecast by the Reserve Bank.

However, adjustments to the policy rate will depend on the rand outlook.

If sustained at current levels and provided the sovereign rating remains intact, the Reserve Bank will have enough justification to ease the policy rate.

Risks of further downgrades are exacerbated by the decline in nominal GDP, which suggests that government will struggle to meet its revenue targets. The shortfall could, however, be managed by cutting government spending, increasing taxes or accruing more debt.

There have been some positives. First, external imbalances are fading. The slowdown in economic growth that started in 2013 has been accompanied by a corresponding correction in the trade balance. After widening to around 2.1% of GDP in 2013 the trade deficit has gradually narrowed and recorded a surplus of 0.3% of GDP in 2016.

Import contraction due to weak demand is expected to continue. Improved commodity prices should bode well for exports. Terms of trade are set to peak this year before slowing in the coming years.

Second, the rand has been supported by increased search for yield. The unit has, despite the temporary blip that followed the cabinet reshuffle, shown resilience.

Third, global reflation, the gradual shift towards policy

Government must commit firmly to fiscal consolidation

normalisation as well as the expansion in fiscal policy, particularly in China and the US, should continue to be supportive of global growth.

However, policy uncertainty and weak business confidence will hold the economy back.

To overcome this low growth trap, domestic political uncertainty needs to subside. The government will have to show firm commitment to fiscal consolidation and the implementation of policies that boost South Africa’s productivity.

Privatisation of state-owned entities and clamping down on wasteful expenditure will help reduce the fiscal deficit notably. These measures should keep the country’s sovereign investment-grade rating intact.

Nxedlana is FNB chief economist