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Photo: Supplied

Economy may shrink as much as 4%, central bank says

By Prinesha Naidoo Time of article published Apr 6, 2020

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JOHANNESBURG - South Africa’s economy could contract by 2% to 4% this year due to the coronavirus pandemic and measures to curb its spread, according to the Reserve Bank.

A 21-day nationwide lockdown aimed at slowing the spread of the pandemic will reduce the rate of change in gross domestic product for this year by 2.6 percentage points, the central bank said in its six-monthly Monetary Policy Review on Monday. The monetary policy committee projected in March that the economy will contract by 0.2%, but that was before the lockdown was announced. “Some growth now becomes irrecoverable,” according to the Reserve Bank.

South Africa’s economy is stuck in its longest downward cycle since World War II, with rolling blackouts and poor business and consumer sentiment weighing on growth. Uncertainty and downward shocks to economic prospects posed by the coronavirus mark “an inauspicious start to a new decade after the serial disappointments of the 2010s,” the central bank said.

The past decade was the worst for South African growth, with total output expanding by only 15.9% between the first quarter of 2010 and the final quarter of 2019, compared 18.9% and 16.7% in the 1980s and 1990s, central bank data show. The 1980s and 1990s were marred by uncertainty when the former all-white government renewed a state of emergency and the country prepared for its first democratic elections.

While the MPC cut its benchmark interest rate by the biggest margin in more than a decade last month to cushion the impact of the virus on an already fragile economy and to support the spending power of companies and households, monetary stimulus alone can’t make up for South Africa’s “significant pre-existing growth constraints,” the central bank said. “Better long-term growth prospects will therefore require a range of interventions, many of them outside the domain of the central bank.”

The coronavirus crisis could push the budget deficit to wartime levels by sapping revenue and potentially increasing spending requirements if the lockdown doesn’t effectively contain the rate of infections, the central bank said. The shortfall could exceed 10% of GDP this fiscal year, it said.

The largest shortfall on record was 11.6% of GDP in 1914, followed by 10.4% in 1940, according to the central bank. The Treasury projected a gap of 6.8% for 2020-21.

While the outbreak will test whether inflation expectations are resistant to shocks, inflation is expected to remain “well contained” within the bank’s 3% to 6% target range until 2022 and weak demand will exert downward pressure on prices, the central bank said.

BLOOMBERG 

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