Johannesburg - The South African economy was dealt a double blow yesterday when the International Monetary Fund (IMF) slashed growth estimates for both this and next year, while a report by the South African Chamber of Commerce and Industry (Sacci) showed business confidence had slid to a 22-year low last month.
The IMF’s reduced outlook came a day after the World Bank cut its own forecasts for the country’s gross domestic product (GDP), reflecting in part the ongoing impact of falling commodity prices, a volatile rand, and poor consumer and business sentiment.
Later this month Finance Minister Nhlanhla Nene is scheduled to deliver his medium-term budget policy statement to Parliament, and it is now a foregone conclusion that he will also cut growth estimates, as did the SA Reserve Bank last month.
Though the economy has become more diversified, mineral exports still account for a significant amount of South Africa’s foreign export earnings. Sacci said a further dent in growth would “have serious consequences for the balance of payments, public sector entities, public finances and employment” which were “already under strain”.
So South Africa finds itself buffeted by both domestic and external shocks, say analysts. Domestically, there continues to be serious strains on the industrial labour front, and externally, a slowing Chinese economy means demand for coal, platinum, iron ore and other commodities will be curtailed.
The IMF reduced its GDP outlook for South Africa to 1.4 percent from 2 percent for 2015, while for 2016 it reduced its forecast to 1.3 percent from 2.1 percent.
The Reserve Bank’s estimate for this year is 1.5 percent.
“While the IMF publication today of its 2015 GDP growth forecast is around consensus, the 2016 forecast of 1.3 percent is a bit of a shock, coming on a 0.8 percent downward revision. Both reflect electricity load shedding and other supply bottlenecks, with structural slowing in emerging markets,” said Annabel Bishop, Investec’s chief economist.
The IMF cut its outlook for global growth this year to 3.1 percent from a July forecast of 3.3 percent. Next year the world economy will expand 3.6 percent, it said, less than the 3.8 percent projected in July. The fund left its outlook for China’s growth at 6.8 percent and 6.3 percent for next year. Still, the “cross-border repercussions” of slowing Chinese growth, it said, “appear greater than previously envisaged”.
The Sacci Business Confidence Index (BCI) contracted to 81.6 in September from 84.3 in August, reflecting the impact of “subdued domestic economic performance, global financial market nervousness, and global economic uncertainty”. The “business mood worsened markedly”, said the chamber.
The September 2015 BCI is the lowest level recorded since July 1993.
Bishop said the country’s business cycle appeared to be in a downward phase.
“South Africa is a small, open economy, impacted by both the slump in the commodity cycle and the expected future normalisation of interest rates in the US. Taken in conjunction with the recent Purchasing Managers’ Index and business cycle indicators, today’s figure points to a weak third quarter,” she said.
“We estimate GDP growth could come in at around 1.4 percent year-on-year for 2015, slightly below the World Bank forecast of 1.5 percent year-on-year. However, even our (2015) forecast is now at risk, given the start of strike action in the coal sector and recent marked deterioration of monthly business cycle indicators,” she said.
The deterioration in growth will compound South Africa’s most entrenched problem of unemployment, which official figures put at 25 percent but could be as high as 40 percent.
David Maynier, the DA shadow minister of finance, said the IMF’s outlook reduction meant there had to be a “policy upgrade” to deal with current economic challenges. “We can only hope the minister of finance announces his own ‘policy upgrade’ during the budget.
“We desperately need an upgrade to tackle the key binding constraints on the economy.”
* With additional reporting by Bloomberg