Johannesburg - If there was still any doubt that the wheels had come off the economy, it was shattered yesterday by the International Monetary Fund (IMF) cutting its economic growth forecast for South Africa.
The lender slashed its forecast by almost half as commodity prices slump and global demand remains weak.
Gross domestic product (GDP) in South Africa would probably expand by 0.7 percent this year, compared with October’s estimate of 1.3 percent, the IMF said in an update to its World Economic Outlook.
Growth of 0.7 percent would be the third-lowest annual growth recorded post-1994 if it turns out to be true.
Tough environment
Since 1994, the lowest annual growth rates have been 0.1 percent growth in 1998 and a 0.5 percent drop in 2009.
The IMF cut its projection for next year by 0.3 percentage points to 1.8 percent.
The National Treasury said in its medium-term budget policy statement in October growth was expected to reach only 1.5 percent in 2015 (previous estimate 2 percent) – the same as in 2014 – and to remain subdued, rising slightly to 1.7 percent this year (previous estimate was 2.4 percent).
It did not respond to a request for comment yesterday.
South Africa’s economy is struggling to cope with a plunge in metal prices, fuelled by a slowdown in its biggest export market, China.
Barclays Africa cut its 2016 GDP growth forecast for South Africa to 0.9 percent from 1.4 percent on Monday, while Bank of America Merrill Lynch slashed its projection by a full percentage point to 0.4 percent last week.
Finance Minister Pravin Gordhan is expected to present new growth forecasts in his February 24 Budget speech.
Nedbank economist Isaac Matshego said the IMF’s sharp revision of South Africa’s growth to below 1 percent was not unexpected, when considering the less favourable macroeconomic environment, both globally and on the local front.
He said the renewed weakness of commodity prices and drought conditions in key farming areas would hurt mining and agricultural output, while manufacturing output growth would be hurt by close links to the primary sectors.
“We have revised our 2015 growth forecast to only 0.2 percent, with risks still to the downside. Wage negotiations in the mining sector and some manufacturing industries will be closely watched. Any wage dispute-related work stoppages could easily tip the economy into recession.”
Colen Garrow, an economist at Lefika Securities, said it should come as little surprise that the IMF had cut this year’s estimate for GDP growth.
“Although it has not explicitly stated the reasons for doing so, evidence continues to grow of the many challenges facing the local economy.”
He said these ranged from the drought, a strong dollar’s effect on commodity markets to slower growth in China.
Rate threat
Garrow said another factor likely to subtract from South African GDP was the rising trend in interest rates, already 125 basis points higher since January 2014, with the prospect of further tightening to come as the Reserve Bank grapples with rising food prices.
“With the fiscal slippage concerning major credit rating agencies, and the possibility growing that a downgrade to a non-investment grade has a better than even chance of happening this year, it is little surprise that GDP estimates are being trimmed.
“There is a growing expectation… that South African GDP growth may remain subdued, if not begin reflecting a state of recession.”
David Maynier, the DA spokesman on finance, said the IMF’s forecast was a full percentage point lower than that by the Treasury for 2016.
He said the fact that the IMF had revised South Africa’s growth rate was partly due to a failure of economic policy.
BUSINESS REPORT