SA economy likely to grow just 0.2% this year - economist

Cape Town - South Africa's gross domestic product (GDP) is likely to grow just 0.2% this year, emerging markets economist Peter Attard Montalto of Nomura said on Tuesday.

He said momentum from agriculture and mining should continue through the year, but will likely be offset by the rest of the economy and real volumes on the export side will remain more sluggish.

"Negative inventory shocks are also a key feature and we think net trend destocking will continue, which has been a feature of the economy post crisis.

"We view the risks to growth this year as very slightly to the upside from the primary sectors and still uncertain, but possibly further to the downside on the investment front, though we think we have been quite aggressive on factoring in those already," said Montalto.

"Second quarter data after the Cabinet reshuffle will likely be important for adjusting forecasts either way to see the relative impact of the reshuffle shock compared to Nenegate."

Nomura forecasts higher growth of 0.8% for next year and with faster global growth, it also believes net trade will be more supportive than in 2017. For 2019 it maintains a growth forecast of 1.2%, reflecting still very low levels of private sector investment and hanging over constraints of previous years of a weak labour market and the constrained consumer.

"For us, 2019 should start to reflect low medium-run potential growth of just 1.5% to 2.0%. All this assumes status quo political outcomes from December and no reform rabbit-out-of-a-hat moment that can turn sentiment and investment around," said Montalto.

"As such, there exists some upside risks on this front – but equally downside risks from more political shocks and a stalling of external growth and possible China slowdown and US protectionism. As such, we view the risks on the medium-run forecast as balanced."

READ: Save SA blames GDP shock on ‘recession president’ Zuma

Fear narrative

As for the SA Reserve Bank (SARB), Montalto thinks the key fact will be that the growth narrative is not changing for the SARB. This is likely to continue to put the bulk of weak growth in the "structural" bucket and attribute it to the political and uncertainty backdrop rather than monetary policy being too tight.

"As such, we see no shift in bias to cut after the data. Indeed, the ‘fear narrative’ is reinforced by low growth as it feeds back through investors’ concerns on fiscal policy, into ratings and the medium-run risk for the rand," said Montalto.
"In our opinion, investors that expect weaker GDP data as a reason to cut rates imminently view the Monetary Policy Committee (MPC) as far too short-termist or backward-looking and too much of growth over inflation targeter."
Nomura also believes the MPC sees few real reasons to cut rates here.

"As previously highlighted, we have stated that the MPC will only cut rates when the long end of the forecast – fourth quarter 2018 and 2019 average CPI inflation - falls to and below 5.0% from 5.5% currently," he explained.

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