Reserve Bank slashes 2018 growth forecast
Bank governor Lesetja Kganyago says the domestic growth outlook remains 'challenging', and demand pressures do not pose a risk to inflation
The Reserve Bank slashed its growth forecast for 2018, a major setback for President Cyril Ramaphosa’s goal of boosting the economy and making headway in cutting a near 30% unemployment rate.
GDP will expand 1.2% in 2018, compared with a previous estimate of 1.7%, Bank governor Lesetja Kganyago said in Pretoria on Thursday.
The Bank expects the growth rate to accelerate to 1.9% in 2019 and 2% the following year, still a percentage point below the 3% rate that Ramaphosa is targeting for the current year, a figure that is also out of line with the Treasury’s predictions.
The economy probably grew marginally in the second quarter, meaning that SA at least avoided slipping to its first recession since the outbreak of the global financial crisis a decade ago.
GDP shrank 2.2% in the first three months of 2018.
The monetary policy committee (MPC) on Thursday kept the repo rate at 6.5%, in line with economists’ forecasts, and the subdued growth forecasts mean the rate is unlikely to rise in the near future, even as inflation accelerates towards the upper end of the Bank’s 3% to 6% target in the next year.
“The reality is that we’re going to see a very subdued picture for the economy, and it’s unlikely that the MPC will hike rates anytime soon,” said BNP Paribas economist Jeff Schultz, who expects the repo rate to stay unchanged for the next 12 to 18 months.
After the initial euphoria that accompanied Ramaphosa’s elevation to the presidency, the outlook for the economy has deteriorated, hit partly by slowing global trade in the wake of US President Donald Trump’s imposition of tariffs on China and other countries, and higher oil prices.
Domestically, confidence has been hit by policy uncertainty amid debates on property rights and the Mining Charter.
Former finance minister Trevor Manuel, who is one of the envoys who Ramaphosa has tasked with helping to raise $100bn for the country, said on Wednesday that explaining the land debate to potential foreign investors was proving harder than expected. Raising the money over the next five years is central to Ramaphosa’s ambitions for the economy.
No risk to inflation
In a signal the Bank is likely to ignore its models that indicate that the repo rate should rise 25 basis points five times by the end of 2020, Kganyago said the weak outlook for the economy meant that demand pressures did not pose a risk to inflation.
The Bank “remains mindful of the weak domestic growth environment and, as such, kept rates unchanged in the hope that doing so can assist slightly better growth”, said FNB chief economist Mamello Matikinca, who expects the MPC to keep rates at current levels throughout 2018.
The rand, which has depreciated more than 7% since the last MPC meeting, was still vulnerable to changes in global interest rates even though policy tightening by the US Federal Reserve was likely to be measured, Kganyago said.
Higher rates in developed countries tend to hurt emerging market currencies such as the rand by diluting their yield advantage. Even after the depreciation, the rand was still undervalued, the governor said, an indication that rate cuts are also unlikely despite the weak economy.
The last time the MPC reduced rates, in March 2018, it described the currency as being overvalued.
“At current levels, the SARB’s model assesses the rand to be undervalued, and it is likely that the rand, along with other emerging market currencies, will remain volatile,” he said.
Stanlib chief economist Kevin Lings said the MPC was likely to keep rates on hold for a considerable period while it tried to gauge the effects on capital flows to emerging economies of changes in global risk appetite as well as further hikes in US interest rates.