Tough task ahead for Zuma and Co

LAST week, President Jacob Zuma was inaugurated and his new cabinet announced. Their task is to implement the National Development Plan, which targets annual growth of 5.4%, and “radical socioeconomic transformation policies and programmes”.

Their task is urgent. Figures this week revealed that the economy had contracted for the first time since the 2008/09 recession.

When searching for explanations for the firstquarter drop in GDP of 0.6%, it is clear that local domestic factors dominate.

Newspaper headlines focus on the collapse in mining output, dragged down by a platinum strike and a drop in manufacturing output amid weak demand, and rising costs.

But growth in the services sector, which expanded at an annualised rate of 1.8% in the first quarter this year, is also

Marcus will need to tighten monetary policy by raising rates in third quarter

subdued. This highlights underlying weakness in domestic demand.

Consumer spending is slowing amid sluggish job creation, waning credit growth, rising inflation and low confidence levels. The country’s tight electricity supply will hang over growth prospects until constraints are eased.

At the same time, inflationary pressure is on the rise.

CPI accelerated to 6.1% in April, breaching the Reserve Bank’s inflation target 3%-6% range. Producer prices also accelerated to an annual 8.8%, which implied further upside price pressures in the months ahead.

HSBC expects CPI to rise above 6.5% later this quarter, which will put more pressure on Reserve Bank governor Gill Marcus to deal with the challenges associated with this enveloping stagflationary malaise. She has been clear on the policy dilemma the bank faces — anaemic growth and rising inflation pressures — but navigating that dilemma could become even more difficult as South Africa’s macroeconomic vulnerability becomes more acute.

There are other knock-on effects of this weak growth.

For one thing, it is likely to undermine tax revenues, while the stoppages in the platinum sector will suppress exports.

The country’s twin deficits — the fiscal deficit and current account deficit — are likely to deteriorate in this environment, and the near-term outlook could be clouded by more poor data, whether from mining and manufacturing production, retail sales, international trade, or GDP growth in the second quarter.

With the platinum strike entering its fifth month, any rebound is likely to be muted.

Since February, HSBC has been forecasting weak growth for South Africa. For this year, it expects the economy to expand just 1.8%.

Slow growth, rising inflation, elevated unemployment and potentially widening deficits on the current account and fiscal balance, highlight the economy’s macroeconomic vulnerability.

Despite the fragile growth outlook, HSBC thinks Marcus will need to tighten monetary policy by raising rates another 50 basis points in the third quarter.

In the short-term, an end to the platinum strike will be critical as to whether the country’s exports and GDP rebound.

Looking beyond the next quarter, though, it will take deeper microeconomic and structural reforms to boost productivity and really get growth going.

The National Development Plan identifies a number of these, but it is prioritisation and implementation that is now needed.

Faulkner is the South Africa economist for HSBC