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Time to batten down the hatches

Cape Town - Citi Research on Friday warned that the risk of an all-out GDP contraction in 2016 is extremely high given the lack of ‘cushioning’ for the economy to withstand external and internal economic shocks.

The economic and market research group cut its 2016 GDP growth forecast for South Africa to a mere 0.3% from 1.1% following the latest round of interest rate hikes. For 2017, it sees GDP growth likely to  manage only 1.1%.

This is a significant slowdown from the 1.4% GDP growth it estimates for 2015 and would be the fifth consecutive year of decelerating economic growth in South Africa.

“Our forecast breaks away again from the consensus, Sarb and National Treasury whose outlooks show a more optimistic view (the caveat here is all three forecasts are likely to be revised down relatively soon in our view). But semantics aside, the risk of an all-out GDP contraction in 2016 has increased,” said Citi economist Gina Schoeman.

She said the external headwinds - low commodity prices and dicey global demand – would typically be sufficient factors to stifle GDP growth for a commodity exporter like South Africa. This is the case for many emerging markets currently.

But it is South Africa’s internal factors that are setting it aside as an outlier amongst its EM peers. “The lack of structural reform, most visible in the sporadic supply and higher costs of electricity and labour, and now indiscernible political outlook are key culprits.

“Brief technical recessions have already been measured in the primary and secondary sectors at times but now there are the additional layers of extreme political and policy uncertainty.

“As a result, business confidence is receding, corporate profitability is falling and the combination is extremely negative for private sector investment and wage bills - salaries and employment,” she said.

Citi’s prediction for job loss, higher inflation and rate hikes should pose further complications to spending power in 2016.

Schoeman said Citi believes the SA Reserve Bank (Sarb) will hike more aggressively in 2016 even if GDP growth sinks lower because the inflation trajectory is far higher now thanks to sharply rising grain prices and a sharply weaker rand.

“Inflation has the ability to hurt the economy more than a steady hiking cycle and thus, we expect rates up by 100bps higher in the first half of 2016.”

Although the rand strengthened significantly to close at R16.19 from a R16.43 opening on Thursday, Schoeman cautions that the local unit will likely take more strain.

“Inadequate demand for commodity exports, low commodity prices and uncertain US monetary policy are reasons to expect a weak ZAR, but the aforementioned local risk premia from the severity of political and policy prospects should compound the weakness,” she said.

Citi is forecasting R18.44/$ for the second half of the year and a still-weak level of R17.60/$ in 2017.

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