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Sarb revises growth forecast to 0.4%

Sep 22 2016 20:01
Lameez Omarjee

Johannesburg – The South African Reserve Bank (Sarb) has revised its growth forecast from 0% to 0.4%, governor Lesetja Kganyago announced on Thursday.

Following the Monetary Policy Committee (MPC) meeting in Pretoria, Kganyago said that the bank would pause the rate hike, which is currently at 7%. This was in line with market expectations. He added that although economic growth showed improvements in the second quarter of the year, the outlook remains constrained for the next two years.

READ: Sarb holds interest rates steady

This is due to weak domestic investment and low levels of business and consumer confidence. The forecasts for the next two years have increased by 0.1 base percentage points to 1.2% for 2017 and 1.6% for 2018.

“While the second quarter growth performance was more favorable, data from July suggest that this improvement is unlikely to be sustained for the third quarter,” he said. Mining and manufacturing sectors reported negative month to month growth rates in July, he explained.

Old Mutual Investment Group echoed these sentiments in a statement. Rian le Roux, chief economist said: “The Q2 number does not mark the start of a strong rebound in the economy, as consumers remain under pressure and business investment is actually contracting as prospects remain bleak and confidence deeply depressed.”

The 0.4%, although weak, will still be helpful for when Finance Minister Pravin Gordhan prepares the medium term budget to be delivered next month, said David Crosoer, head of research and investments at PPS Investments. Crosoer told Fin24 that Sarb’s previous forecast of 0% left little room for Gordhan to set up a credible budget. “This makes it possible for him to do something with the budget that makes everyone happy,” he said.

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Kganyago said that growth prospects depend on global conditions, implementing structural reforms and changes to business and consumer confidence.

Crosoer added that investor confidence would most likely improve once there is stability within the political sphere. “It’s difficult to make long-term investment decisions when there is so much uncertainty.”

He said that although the global growth environment was difficult to control, investor and business confidence would improve if the global economic outlook improved.

Inflation forecast

Inflation is expected to peak at 6.7% in the fourth quarter, compared to 7.1% projected previously. Inflation is expected to average at 6.4% in 2016, and 5.8% in 2017, said Kganyago. The forecast for 2018 is unchanged at 5.5%. FNB chief economist Sizwe Nxedlana added that the bank expects inflation in 2017 to remain within the targeted range.

Inflation expectations have remained unchanged. Expectations for 2017 declined 0.2 base percentage points to 6% and remain unchanged at 5.9% in 2018.

Nxedlana explained that the central bank may have reached the end of its hiking cycle. Given that the rand exchange has remained stable over the past few months and because there has been a downturn in international agricultural commodity prices, as well as “easy” global monetary policy conditions.

However, in a question and answer session with the press, Kganyago explained that a lot of uncertainties remain in the economy and global financial markets. As a result the Sarb may review its decisions if conditions worsen.

Old Mutual believes that the hiking cycle may be done, provided that the slowing global growth trend improves. “If a global slowdown were to significantly impact on commodity prices and the rand, the Sarb will have little choice but to hike rates again,” said le Roux.

However if global growth is not “bad enough” to hit the rand and commodity prices, the Sarb will likely stay on hold, until it is comfortable with the local inflation outlook, he added.

A US rate hike before year end could also influence Sarb’s decision. This may “firm up” the US dollar and negatively impact the rand and commodity prices, he explained. But le Roux was more concerned about the impact of domestic risks such as politics and the risk of a ratings downgrade .

Old Mutual is of the view that inflation should ease in 2017, averaging around 5.5%. “We think conditions might well fall in place for the Sarb to start considering lowering interest rates later in 2017.” 

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