South Africa’s growth forecast for the year has been slashed by the International Monetary Fund (IMF). The global lender predicted yesterday that the domestic economy would grow just 2 percent, well down from the 2.8 percent estimate in April. The forecast for next year has been reduced from 3.3 percent to 2.9 percent.
Axel Schimmelpfennig, the IMF representative in South Africa, said that he would provide more country detail next month.
The growth outlook for this year has already been downgraded domestically. At the time of the February Budget, growth was expected to be 2.7 percent this calendar year and 3.5 percent next year.
However, annualised growth of less than 1 percent in the first quarter lowered expectations. In May, the Reserve Bank cut its forecast for this year to 2.4 percent from 2.7 percent; and to 3.5 percent from 3.7 percent for next year.
Slower growth has implications for job creation and also for the state of government finances. A reduction in economic activity means a slower stream of revenue to the fiscus, at a time when government spending growth is running ahead of budgeted targets.
The IMF, which urged key advanced economies to continue to pump cash into their economies, downgraded its world growth forecast to 3.1 percent this year, from its April estimate of 3.3 percent. And it projected growth of 3.8 percent next year, down from 4 percent.
The IMF said: “With low inflation and sizable economic slack, monetary policy stimulus should continue until the recovery is well established.”
The international lender advised: “Potential adverse side effects should be contained with regulatory and macro prudential policies.” In other words, rules around lending should prevent a credit bubble.
However, the imposition of credit restrictions requires a delicate balancing act if the impact is not to spill over to the real economy – less access to credit means companies grow at a slower rate. This is evident in China where growth forecasts have been cut since the new regime restricted credit to stave off a property bubble.
The IMF slashed its growth forecasts for China this year and next year to 7.8 percent and 7.7 percent from 8 percent and 8.2 percent respectively.
Barclays analyst Jian Chang predicted yesterday that monetary policy in China would remain “prudent with a bias towards tighter liquidity” in the second half of the year.
Other factors also limit China’s future growth potential, including the “law of large numbers”, according to Investment Solutions chief investment officer Glenn Silverman.
The bigger the economy the bigger the base off which growth is measured.
Silverman said, with a gross domestic product of $8.2 trillion (R84 trillion), the world’s second-largest economy has grown at over an average 8 percent annually for five decades.
The US would grow only 1.7 percent this year and 2.7 percent next year, the IMF said, down from the April estimate of 1.9 percent and 3 percent respectively.