Nene warns on lower economic growth

2015-10-21 15:01 - Jaco Leuvennink
Finance Minister Nhlanhla Nene. (GCIS) ~ Supplied

Cape Town - Finance Minister Nhlanhla Nene revised South Africa's expected economic growth rate for this year downward to 1.5% from the 2.0% mentioned in the main budget in February when he presented his mini budget to parliament on Wednesday.

This has implications for the budget deficit and fiscal stability because of the impact on the amount of taxes to be collected, but Nene also stressed that any hiking of taxes in the main budget in February will be approached with caution. Projected gross tax revenue will be down by R35bn between 2015/16 and 2017/18.

The budget deficit though will remain broadly at 3.9% of gross domestic product for 2015/16. This will be achieved by reprioritising expenditure, reallocating funds (when unspent) and spending shifts, selling of state assets, austerity measures and the use of the contingency reserve.

The SA economy is expected to grow by 1.7% in 2016 and 2.6% in 2017. World economic growth has also slowed from 5% last year, with the International Monetary Fund revising its in-year growth forecast downward three times, most recently to 3.1%.

Economic growth in developed economies is expected to rise gradually. Lower energy prices, favourable interest rates and improving confidence and labour-market conditions are expected to boost European and Japanese performance and to support continued growth in the United States, according to the mini budget.

By contrast, lower commodity prices, weaker domestic demand, tighter financial conditions and slower capital inflows have moderated growth in developing economies. If forecasts are realised, developing countries will experience the slowest three-year growth outcomes since the Asian financial crisis of the late 1990s.

Growth in sub-Saharan Africa is expected to decline to 3.8% in 2015 from 5% in 2014, largely as a result of weaker commodity prices and lower demand from China.

Developing economies now produce about 58% of global output, compared to just 42 % in the late 1990s.

Electricity supply will remain a binding constraint to the SA economy through 2016, limiting output and dampening business and consumer confidence. Easing electricity, transport and telecommunications infrastructure constraints - alongside improved confidence and higher demand from major trading partners - is expected to boost GDP growth to 2.8% in 2018.

Estimated investment growth of 1.2% in 2015 is supported by general government. Private sector investment is expected to improve in the outer year, bringing total investment growth to 3.8% by 2018. With limited investment growth over the next two years, however, there will be little support for significant employment gains. As a result, household consumption growth is expected to rise above 2% only in 2017.

Exports are forecast to grow by 8.3% in 2015, bolstered by relatively strong performance in the first half of the year. Growth is not expected to be as strong during 2016 due to the high base of 2015.

However, easing infrastructure constraints and improved global growth will support growth of 5.5% by 2018. Import growth is expected to outpace export growth over the forecast period as domestic demand recovers, boosting imports of both capital and consumption goods.

The current account deficit is expected to narrow to 4.1% of GDP in 2015, owing to healthy export performance and terms of trade gains in the first half of the year. Import growth, however, is expected to widen the current account deficit to 4.85 of GDP by 2018.

Inflation has been in line with 2015 budget forecasts. Upward pressure on food prices and higher petrol inflation are expected to push consumer price index inflation above the 6% target ceiling in the first half of 2016.

The forecast takes into account a 12.7% per year electricity price hike. Upside risks to the inflation forecast revolve around additional exchange rate depreciation, the extent to which businesses can continue to absorb higher input costs from the weaker rand and electricity price increases.

External risks to the economic forecast include a further slowdown in the global economy (especially among South Africa’s main trading partners), higher oil prices, lower export commodity prices and increased financial market volatility resulting in capital outflows. Electricity supply shortages pose the largest domestic risk to growth, according to the mini budget.