Slow SA growth increases vulnerabilities, warns economist

Johannesburg – A recovery in confidence levels is what the South African economy needs to grow, said an analyst.

Rian le Roux, economic strategist at Old Mutual Investment Group, was speaking at a briefing on the economic outlook.

Confidence is currently the biggest thing lacking in the economy, said Le Roux. Looking back at 1994 when confidence levels were “deeply depressed”, a recovery in confidence led to a surge in business investment. Although there is no certainty that this could be repeated, it could happen, he said.

Restoring confidence starts with policy certainty, he explained. “Policy direction and certainty are key.”

The outcomes of the recent ANC policy conference revealed that “pragmatic policy” is still dominant. Radical proposals were not accepted. Further the fact that the finance minister hit back at the public protector’s remedial action to change the mandate of the Reserve Bank shows that pragmatic policies are still followed, said Le Roux. Nevertheless, policy concerns still linger as was seen with the new mining charter.

Other positives for the economy include the strong push back against corruption, state capture and the undermining of key institutions like the media and Reserve Bank, said Le Roux.

Further, the high frequency of activity in sectors such as agriculture, mining, manufacturing and electricity suggest that the economy is probably out of a recession already, he said.

Tracking of the GDP growth in the second quarter indicates growth over 2%, an improvement from the -0.3% contraction in the first quarter.

But overall, GDP for the year is expected to be below 1% at 0.8%. Being stuck in a below-potential growth environment is not what the economy needs, said Le Roux. “Slow growth increases vulnerabilities.” This stagnation is a concern for the International Monetary Fund (IMF) too, he added.

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“It is critical to get the growth of the economy up.” The lack of investment by the private sector, down 11%, reflects concerns about the economy. The investment strike could be extended if confidence does not improve.

“The risk of losing investment grade still a worry,” said Le Roux. Losing investment grade on local bonds could trigger trouble. Further the rand would weaken significantly, putting the view of a rate cut in jeopardy.

Inflation is expected to continue falling, and with the recent petrol price cut, it could end the year at 5%, said Le Roux. The current account deficit is also likely to improve, given the improving trade balance. Interest rate cuts are expected for the second half of the year, provided that the rand does not weaken, he explained.

However there are concerns about fiscal revenue collection, this has been weak since the start of the year with growth of 0.4%. This will also be a concern for ratings agencies. The budget target for growth is at 9%.

These are however early days, said Le Roux. “If the fiscal situation does not deteriorate materially, that will help,” said Le Roux, adding that achieving the targeted revenue numbers are not completely impossible.

He warned that the plan for fiscal consolidation could be undermined if the economy enters structural stagnation. 

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