South Africa: Economic outlook still calls for caution

By Rafiq Raji, PhD

Even though the South African economy probably exited recession in the second quarter of the year, the outlook remains mixed. My current forecasts suppose growth was 1.2 percent in Q2-2017, after contractions of 0.7 percent and 0.3 percent in the preceding two quarters respectively. Business confidence recovered in June, with the index up to 94.9 from 93.2 a month earlier, a seven-month low then. And yes, annual consumer inflation continues to decelerate, coming out at 5.4 percent in May from 6.6 percent five months earlier, and would probably slow further in June to 5.2 percent, say. It could be about 5 percent or less by year-end, within the central bank’s 3-6 percent target inflation band.

But the most recent consumer confidence reading was poor. It deteriorated further in the second quarter of 2017 to -9 from -5 in the preceding three months, as consumers remain weighed down by a sluggish and dysfunctional labour market, high taxes and still dear but decreasing food prices. The most recent Purchasing Managers’ Index (PMI) data, a bellwether of the economy, was not encouraging either. That compiled by Markit fell to 49.0 in June, a 14-month low, from 50.2 the month earlier. Unsurprisingly, the IMF continues to warn about the economy’s vulnerabilities to external shocks and funding shortfalls, as recently as early July, even as it remains steadfast on its 1 percent growth projection for the economy this year. (Mine is 0.5 percent.) A subsisting toxic political environment would continue to be detrimental to business and consumer confidence, it adds.

It is heartening, of course, that finance minister Malusi Gigaba has a plan to supposedly steer the economy out of its current recession, unveiled in the week just past. More store would be put in how much will there is to implement it and how transparently so than its content, though. The tone of the plan certainly echoes the radical economic transformation drift of the ruling African National Congress (ANC) party. Some state enterprises would be partially privatised, non-core state assets would be sold, and so on. A sustainable wage agreement by February 2018, two months after the ANC elective conference, is probably going to be a tall order, though. The proposed financial sector, tax and procurement reforms are within Mr Gigaba’s powers at least. So these should be relatively easy. State-owned enterprises’ reforms may not be quite so.

Not yet
Arguably, the economy could use some reprieve from the monetary authorities. Thankfully, there is some room for the South African Reserve Bank (SARB) to begin to cut rates before year-end, which could be as early as this quarter, by 25 basis points to 6.75 percent, say. Another 25 basis point cut to 6.5 percent in Q4-2017 would also not be farfetched. A rate cut would probably be unwise at the July monetary policy committee (MPC) meeting, however, especially as the SARB fervently tries to fend off imminent political interference from stakeholders who see policy easing as the only way out of the doldrums for the South African economy. Not only must the SARB seem to remain stubbornly on its inflation-targeting path, the toxic politics that has forced it into war-mode also inevitably imperil any potential dovish policy action: it has to avoid even the slightest perception that it is susceptible to pressure. Still, the assault on the SARB is real. It is much heartening that Governor Lesetja Kganyago has shown an almost fanatical zeal to protect the mandate and independence of the bank.

We the people or we the few
Of course, there would be worries about whether Mr Gigaba’s plan is not just another opportunity for corruption and other unseemly acts that have come to be associated with the Jacob Zuma government. All these are amid still ongoing controversy over the increasingly rampant use of state institutions to achieve what are clearly selfish political objectives. Some argue the major problem is not the ANC per se, but President Zuma. One analyst estimated cheekily recently that his poor stewardship might have cost the South African economy about 1 trillion rand, a quarter of 2016 output. In frustration, or perhaps sensing an opportunity, the South African Communist Party (SACP), one of the three-member ANC-led governing tripartite alliance, recently declared it would contest the 2019 elections independently, whilst still maintaining a foothold in the ruling government. Of course, hedging as such is as much due to the SACP’s disillusionment with Mr Zuma as well as its feeble conviction in its electoral prospects. Had the older SACP taken on the mantle now ably assumed by the young ultra-nationalist Economic Freedom Fighters (EFF) opposition party much earlier, the story could have been a little different. The economy’s prospects could be so much brighter without Mr Zuma.

Also published in my BusinessDay Nigeria newspaper column (Tuesdays). See link viz.

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