By Rian le Roux, 8 December 2014
Incoming economic data remains pretty weak and consensus growth forecasts for this year continue to be revised down. At the beginning of the year, consensus forecasts predicted about 3% GDP growth for 2014, but this has now slipped to little over 1% and forecasts for 2015 are also being revised lower, with only a weak recovery of little more than 2% growth forecast for next year.
Last month we highlighted the growing fiscal pressure on government that is being exacerbated by the slowing economy and the resultant potential pressure on tax revenues. As a result, markets were concerned that Minister Nene would postpone fiscal consolidation in the October Medium Term Budget Policy Statement (MTBPS). However, to the surprise of almost all, the Minister insisted fiscal consolidation could no longer be postponed and maintained the previous lower deficit forecasts for the next few years. To achieve these deficit targets, he slightly lowered the nominal spending ceiling for the next two years and strongly hinted at forthcoming tax increases.
The Minister admitted that the upcoming wage negotiations with the 1.3 million civil servants were a key risk to the fiscal outlook, but insisted that if the settlement exceeded CPI +1%, job losses in the public sector were inevitable. Overall, the mid-term update was well received and added to the recovery of the rand, even though it should be borne in mind that the Minister only really made promises about fiscal consolidation, and that markets will watch to see if real progress is actually made over the next year or so.
A piece of decidedly good news was an unexpectedly sharp fall in inflation from 6.4% in August to 5.9% in September – with the sharp deceleration in food inflation from 9.5% to 8.7% playing a key role. The rate remained unchanged at 5.9% in October. Looking forward, inflation prospects have undoubtedly taken a turn for the better. Apart from a slump in the oil price that has resulted in a 8% decline in the petrol price since July (but not yet fully reflected in the CPI figures), prospects of further fiscal and monetary tightening over the next year will also help keep inflation pressures at bay.
While the SARB kept interest rates unchanged at the mid-November meeting, we are of the opinion that the repo rate will rise further over the next year or so, as it remains low – both against current inflation and also when compared to global peers. In addition, with commodity prices under sustained downward pressure, a much needed narrowing of the current account deficit may require further import compression via higher interest rates.
Overall, the prospects for the SA economy remain rather poor given difficult global conditions; a need for fiscal and monetary tightening; ongoing electricity constraints; sustained financial pressure on consumers; and the growing unwillingness of the private sector to invest in new capacity owing to poor prospects for the economy. Decisive policy action to propel the economy onto a higher growth path is becoming more urgent by the day. Indeed, unless urgent action is taken soon to raise the economy’s growth potential, SA will continue to struggle to grow faster, create jobs and maintain an investment-grade rating.