Johannesburg – The Reserve Bank has revised down growth from 1% to 0.5%, governor Lesetja Kganyago announced on Thursday.
The Monetary Policy Committee (MPC) decided to lower the repo rate 25 basis points to 6.75%. During the announcement, Kganyago said that the growth outlook remains challenging given the recessionary conditions following the GDP contraction during the first quarter.
“While positive growth is expected in the second quarter, the bank’s annual growth forecasts have been revised down further,” he said. The forecast for 2018 has been revised down from 1.5% to 1.2% and growth for 2019 has been revised down from 1.7% to 1.5%.
The lower growth forecasts were in line with some analysts’ expectations.
Kganyago explained that the poor outlook matched the decline in business confidence, measured by the RMB/BER Business Confidence Index, which has reached levels during the recession following the Global financial Crisis.
He pointed out that improvements in mining and manufacturing activity will only make a marginal contribution to positive growth for the second quarter. Other factors weighing down growth include poor investment and capital formation.
“Policy uncertainty, a recent example being in the mining sector, is likely to constrain investment,” he said. Similarly lower consumer confidence will be reflected in lower expected consumption expenditure by households.
“It is unclear where the drivers of accelerated growth will come from in the absence of credible structural policy initiatives that will reduce uncertainty and increase business and consumer confidence,” said Kganyago.
Monetary policy should not be viewed as a solution to structural growth constraints, he explained. The MPC does not believe reduced interest rates will provide the stimulus needed for growth given the low confidence, and political uncertainty.
Francois Groepe, deputy governor, explained there are both structural factors and cyclical factors impacting growth. The MPC can play a significant role in stimulating the economy if the slow down are of a cyclical nature, he said.
South Africa’s low growth is not cyclical, said Kganyago. The two policies appropriate for cyclical growth are the fiscal and monetary policy which can affect growth on margins.
“But we are very clear, our focus is the protection of the value of the currency, in the interest of sustainable and balanced growth.” Kganyago said that “tinkering” with the monetary policy will not produce the needed engineers or build ports and produce PhDs.
Lifting growth potential lies within the “realm” of structural reform and micro-policies. “We cannot lift potential growth,” he said. Potential growth is like a speed limit. You can try to stimulate growth, but going beyond the speed limit will lead to problems. “Fortunately we are still below the speed limit. We need the structural reforms to lift the potential growth rate.”
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