Gloomy economy set to vex Nene
Reserve Bank sees dark clouds as key indicator slips
WHEN Finance Minister Nhlanhla Nene stands before Parliament this afternoon to deliver the medium-term budget policy statement, the reality of a struggling economy will not be lost on the nation.
Data released yesterday show the leading business cycle indicator of the Reserve Bank slid to a six-year low in August, signaling the economy might already be mired in recession.
Fragile
As if to compound Nene’s difficulties, Lesetja Kganyago, the governor of the Reserve Bank, said yesterday that South Africa’s economic growth outlook was extremely fragile. It is highly unusual for the governor of the central bank to comment on the economy on the eve of the mini budget.
The economy is in the doldrums, having shrunk by 1.3 percent in the second quarter, fuelling recession fears.
Kganyago said: “Of concern was the fact that it (the contraction) was broad-based across sectors, with only the finance, real estate, and business services showing reasonable performance, recording growth of 2.7 percent.”
He noted that one of the main constraints to investment in South Africa was uncertainty over the electricity supply, which had both short- and long-term impacts.
Loadshedding affects output immediately and was reflected in the weaker current gross domestic product (GDP) growth outcomes, Kganyago said.
“But of greater concern is the longer-term impact that electricity supply constraints have on potential output growth, as forward-looking plans are delayed or even shelved because of lack of guarantees of electricity supply,” Kganyago said.
“Apart from electricity supply issues, growth is expected to be constrained by weak private sector investment and subdued growth in household consumption expenditure amid low levels of both business and consumer confidence.”
The impact of the commodity price bust was significant on South Africa since the trend began in 2011 and sped up in the middle of this year, he said.
The platinum price, which has almost halved since the beginning of 2012, and the 25 percent drop in iron ore prices are cases in point.
Kganyago said the country had to look carefully at some domestic policies that had the potential to undermine exports or to “counter the favourable impact of depreciation”.
The Reserve Bank expects the current account deficit to average 4 percent of GDP this year and next.
Recession
Meanwhile, according to data released by the Reserve Bank yesterday, the year-on-year growth in its leading indicator declined to 4.7 percent, its lowest level since South Africa emerged from the last recession in 2009, but on a month-onmonth basis it came out marginally weaker, at minus 0.1 percent.
Colen Garrow, an economist at Lefika Securities, said that on the face of it, this supported the view that South Africa had fallen into a recession.
He said markets would only know for certain on November 24, when Statistics SA released third-quarter GDP data.
The indicator collates data including vehicle sales, job advertisements, business confidence and money supply to gauge the economic outlook.
Azar Jammine, the chief economist at Econometrix, said the Reserve Bank itself was likely to take note of the continuing slowing trend of its leading indicator and was likely to refrain from raising interest rates until at least next year.
“Nene will be compelled to explain how government will raise sufficient tax revenue in the face of low growth to accommodate its expenditure programme without raising the budget deficit over the next three years,” Jammine added.
Reserve Bank deputy governor Daniel Mminele said yesterday that the exchange rate of the rand against the dollar had been mentioned time and again as a significant risk to the domestic inflation outlook, with implications for the pace of domestic policy normalisation.
Rate increases
He said the expected interest rate increases by the US Federal Reserve had been partly priced into South Africa’s exchange rate, but it was not clear by how much.
He said it was important to note the domestic policy response was not as simple as responding to each Fed hike, as some analysts sometimes seem to suggest.
“The implications and spillovers of Fed rate hikes have to be viewed alongside other domestic and global factors, which have a bearing on the domestic economic outlook and the mandate of the SA Reserve Bank.”