Picture: ISTOCK
Picture: ISTOCK

Merrill Lynch has slashed its growth forecast for SA following the shock GDP figures, which showed the country is in a recession.

In a report released on Wednesday, the bank cut its growth forecast to 0.9% from 1.6%. It also revised its growth forecast for 2019 from 1.8% to 1.5%.

As some economists warn of the wrath of credit rating agencies, Merrill Lynch said SA will likely continue to get a reprieve this year. However, the government will come under intense scrutiny over the next few months.

"We expect no rating changes during November reviews but further revenue shortfalls, increasing populist pressures and a need for state-owned enterprise (SOE) bailouts could raise downgrade risks after the February budget," reads the report.

Weak growth implies there are risks of further fiscal slippage during the medium-term budget policy statement at the end of October, Merrill Lynch said, and also warned of the continued uncertainty around land reform, stressing that "current uncertainty will continue to deter investment".

The bank, however, does not expect explicit damage to property rights from land reform. Any changes to the constitution will likely be specifically applicable to land and only under explicit conditions and circumstances, it said.

Data from Stats SA on Tuesday came as a shock to the market. SA’s economy contracted by 0.7% in the three months ended June, following a dismal performance in the first quarter, which was revised down from a 2.2% contraction to one of 2.6%. Two months of negative growth is an indication that the economy is in recession.

Despite the weaker rand and faltering economy, Merrill Lynch says the South African Reserve Bank will likely hold interest rates at the next meeting of the monetary policy committee at the end of September.