Bank of America’s wealth management arm Merrill Lynch cut its forecast for South Africa’s growth for this year from 1.6% to 0.9%. Photo: Reuters

JOHANNESBURG – Bank of America’s wealth management arm Merrill Lynch has become the first institution to slash South Africa’s growth forecast as the latest private sector activity data disappointed highlighting what a challenge it will be to revive the economy.

The firm on Wednesday cut its forecast for South Africa’s growth for this year from 1.6 percent to 0.9 percent, with more organisations expected to follow suit. 

The company further cut its growth forecast for next year from 1.8 percent to 1.5 percent.

However, the firm said it expected no rating changes during November reviews, but that further revenue shortfalls, increasing populist pressures and a need for state-owned entities bailouts could raise downgrade risks after the February budget.

“Focus on land and other populist measures will detract from long-term structural reforms to support the cyclical recovery, in our view,” Merril Lynch said.

The group’s assessment came a day after official data showed the country had slipped into recession - its first since 2009.

Investec has already indicated its appetite to revise South Africa’s growth forecasts. 

“We will likely revise our GDP forecast downwards for 2018, from 1.4 percent year-on-year currently,” said Lara Hodes, an economist at Investec.  The bank said the possibility of further financial market stress, escalating trade protectionism and heightened geopolitical tensions had left the economy vulnerable to further weakness going forward.

Adding more pressure to the ailing economy was the Standard Bank Purchasing Managers Index (PMI) which painted a dire picture of the country’s economy.

The PMI released yesterday (correct) fell from 49.3 in July to a 29-month low of 47.2 during August.

Standard Bank said the sharp decline in private sector activity was due to inflationary pressures and deteriorating consumer purchasing power which saw new work received by private sector firm’s declining at the second-quickest rate in the survey history during August.

The plunge in the PMI was broad-based as new orders, output, employment and inventories fell further in the period.

Thanda Sithole, an economist at Standard Bank, said August’s survey findings boded ill for the South African economy in the latter half of this year

“The poorly performing PMI reflects economic policy uncertainty, increased cost pressures from elevated oil prices, rand weakness and labour strikes. Even our below-consensus real GDP growth of 1.2 percent for 2018 might now disappoint,” Sithole said.

Data at hand thus far has suggested that weakness in South Africa’s economy extended to the third quarter.

The Absa PMI for August, which looked into the health of the manufacturing sector, also came in at a multi-year low.

The data released on Monday showed that activity in the sector plunged 8.1 points to 43.4 points - the lowest reading in more than a year.

“Recent PMI prints point to further weakness in business sentiment in the third quarter with the land reform debate likely to keep new projects on the sidelines,” Merril Lynch said.

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- BUSINESS REPORT