‘SA's economy to improve in second half’

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IOL economy arrows Filomena Scalise

Johannesburg - South Africa's economy is set to pick up slightly in the second half of this year as industrial strikes are resolved, but rising interest rates will hold it back running into next year, keeping growth well below potential.

A monthly Reuters poll of 32 economists forecast the economy will grow 1.7 percent this year, 0.1 percentage point lower than the consensus in last month's poll.

However, economic growth will accelerate to 3 percent in the fourth quarter of 2014 on a seasonally adjusted annualised basis, from 2.0 percent in the third quarter and an estimated 1.3 percent in the second quarter.

“South Africa probably avoided entering recession this year, but the bigger picture is that growth remains weak,” said Shilan Shah of Capital Economics in London.

Growth is forecast to improve to 2.7 percent next year but that is still low - in the five years before it suffered a recession in 2009, South Africa averaged annual economic growth of 5 percent.

It is set to continue to underperform faster-growing African economies like Nigeria, which recently overtook it as the continent's biggest economy, and Ghana.

South Africa has been hit by crippling strikes in the metals sector this year which have also hit car production, but as the biggest strikes have now been resolved industrial output should improve in the second half. Rising interest rates will pose risks to business, however.

The poll, taken in the past week, forecasts the repo rate, which has risen by a cumulative 75 basis points since January to 5.75 percent, will end the year at 6.0 percent as the South African Reserve Bank seeks to contain inflation.

The central bank will then raise the repo rate by another 50 basis points in each of the two following years.

As a result, inflation is expected to ease back to the Reserve Bank's comfort level, averaging 5.7 percent in 2015, down from an estimated 6.3 percent this year.

Higher interest rates are also likely to curb consumer spending.

South African household debt averages around 75 percent of disposable income, meaning servicing debt is a huge burden for low-income households, where food costs alone account for a third of expenditure.

The economy will also be vulnerable to tighter US monetary policy as the Federal Reserve is expected to start raising interest rates next year.

That could pull funds away from South Africa and other emerging markets as US yields look more attractive than before and there is less excess cash in the global system.

“South Africa remains vulnerable to renewed turmoil as markets shift their attention to the start of the US Fed's rate hiking cycle,” said Shah. - Reuters



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