SA growth lagging behind potential

Filomena Scalise

Filomena Scalise

Published Mar 13, 2014

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Johannesburg - South Africa's economy will not expand this year at the healthy rate seen in the past as rising interest rates crimp growth and its main trading partners struggle, a Reuters poll found on Wednesday.

Africa's largest economy will grow by just 2.5 percent this year, the survey predicted, a far cry from its boom times.

But the latest findings are in line with last month's consensus when economists trimmed growth forecasts based on the view higher interest rates would hurt household spending.

The Reserve Bank raised its repo rate by 50 basis points to 5.5 percent in January and the latest median estimate suggests it will hike by the same amount again before the end of this year, with a 43 percent probability it does so this month.

The survey shows another 100 basis points worth of rises to 7 percent the following year.

The health of South Africa's largest trading partners is critical to its economic prospects.

But growth is predicted to be softer in China and tepid at best in the euro zone while stubbornly high unemployment will hurt the United States, the world's biggest economy.

“There is still lingering concern about the resilience of the global economy and that the uneven recovery may continue to disappoint,” said Elna Moolman, economist at Macquarie Securities.

Peter Worthington of Barclays Africa also listed delays in infrastructure projects, especially electricity, and fractious labour relations as impediments to growth.

During South Africa's boom years between 2004-07, before the global financial crisis began, economic growth punched above 4 percent and interest rates were set above 7 percent, peaking at 11 percent as growth thrived.

The Reserve Bank's rate hike in January was described by policymakers as a means to curb higher inflation but the latest Reuters survey predicts it will still average at the top end of the central bank's comfort level of 6 percent this year.

And there is an almost 50 percent chance inflation will rise above their given forecasts due to a weak rand, economists who responded to an extra question said.

Indeed, the January rate rise, the first in nearly six years, was delivered as the rand and other emerging market currencies like the Turkish lira were in free fall.

Still, for a second straight month, analysts surveyed in a separate Reuters poll see the rand weakening this year as it gets caught in the crosshairs of emerging market capital outflows and an ascendant US dollar.

The currency has also has been undermined by an uncomfortably high current account deficit. It narrowed more than expected in the final quarter of 2013 to 5.1 percent of GDP from 6.8 percent previously, data showed on Wednesday.

The latest Reuters survey suggests the current account deficit will average this year at 5.6 percent of GDP and narrow to 5.0 percent next year. - Reuters

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