Tough times ahead amid lower economic growth

2017-10-25 14:21 - Jaco Leuvennink
iStock

Cape Town - South Africans should brace themselves for tough times ahead. South Africa's economic prospects deteriorated considerably since February this year, the mini budget shows.

The 2017 Budget projected GDP growth of 1.3% in 2017. That projection has been revised down to 0.7%, following a recession in the fourth quarter of 2016 and the first quarter of this year. Economic growth is expected to recover slowly, reaching 1.9% in 2020. The average expected growth rate for sub-Saharan Africa for this year is much better on 2.6%.

The weaker growth outlook reflects a continued deterioration in business and consumer confidence (mainly over concerns about policy and political uncertainty) that has gathered pace since 2014. It also flows from perceptions of heightened risk as indicated in lower credit ratings, higher bond yields and sluggish investment.

In 2016, gross fixed capital investment declined by 3.9%, with large decreases in mining and manufacturing. Capital investment is expected to decline by 0.6% in the current year.

Conditions in the global economy continue to improve, but the risks of financial turbulence remain high, and the longer-term outlook for growth and commodity prices is muted.

Total capital investment fell by 1.1% in the first half of 2017 compared with a 2.7% decline in the corresponding period of 2016. Investment by general government grew by 6.3%. Investment by public and private corporations fell by 3.75% and 2.5% respectively.

Capital investment by public corporations has declined for four consecutive quarters. In 2016, total capital investment declined for the first time since 2010, with large decreases in mining and manufacturing.

Private-sector investment accounts for 60% of South Africa’s total investment. Weak domestic demand and continued policy uncertainty continue to curb investment plans. Over the long term, this reduces the economy’s potential growth rate. Gross fixed capital formation is
expected to average 2.3% growth over the next three years.

Inflation expectations remain near the upper end of the target band (6%). However, the inflation outlook has improved since the 2017 Budget. Headline inflation is now expected to average 5.4% in 2017, down from 6.4%.

The revisions to the inflation outlook reflect lower oil and food prices, and a slightly stronger exchange rate assumption. The risks to the inflation outlook remain currency depreciation, higher oil prices, rising electricity tariffs and further sovereign rating downgrades.

Formal non-agricultural employment declined by 0.2% in the first half of 2017 compared to the same period last year. Employment in community services fell by 41 041 during the first half of the year. Financial and business services lost 7 681 jobs over the same period, mostly in banking and insurance.

Employment prospects in manufacturing remain constrained. Similarly, employment growth in the trade sector is likely to remain under pressure given low consumer confidence and weak credit growth. Mining recovered some jobs in the first half of 2017 expanding employment by 1.6%.

The ability of the economy to absorb new workers peaked in 2008 and has not recovered. An estimated 6.2 million South Africans are actively looking for work, the MTBPS states.

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