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SA lacks growth driver
While global economic growth is slow, but expecting improvements through to 2015, the South African economy is caught in a low-level stagflationary bind, according to Rian le Roux, Chief Economist at Old Mutual Investment Group.
Roux says that meaningful policy reforms are necessary to raise both the growth and employment potential and that partial reforms are unlikely to drag South Africa out of the low growth and employment trap.
Le Roux says that a only a moderate recovery is expected in late 2014 into 2015 and the longer growth potential will likely be stuck around the three percent level. “Inflation, in contrast, has recently exited the SARB’s three to six percent target range and, while it is expected to drift back into range towards year-end, longer term inflation expectation continue to hover around the six percent level.”
South Africa’s economy is facing considerable structural and cyclical headwinds, with the growth forecast for 2014 dropping to about 1.5 percent compared to about three percent as recently as January. “South Africa’s economy remains cyclically depressed, with supply disruptions an added depressant. Moreover, a lack of fundamental economic growth drivers such as those seen during the mining/infrastructure booms of the 1950s and 1960s, means that the economy is caught in a low-growth trap,” he explains.
Despite the expected moderate economic recovery, South Africa faces considerable challenges, including still large current account and budget deficits, inflation pressures, and depressed consumer and business confidence.
Looking further afield, Le Roux believes that while a global recovery is underway, this is US-led and the remaining regions are seeing slow, erratic, and fragile growth. “This means that US policy normalisation will lead the rest of the world and, despite likely being slow and well-signalled, eventual policy rate increases from around mid-2015 may bring renewed pressures to the Emerging Markets, especially ones with weak fundamentals,” he explains. “This holds renewed risks for South Africa, unless our overall macro-economic outlook has taken a turn for the better by then.”
Le Roux also pointed out that inflation may deliver a downside surprise if the rand stabilises. “We expect the rand to steady as the current account gradually narrows, however key risks remain as an effect of the US rate hikes in 2015,” says Le Roux.
“We are therefore looking towards decisive policy initiatives to address these deficits in the system as well as to raise the growth potential. While we are seeing a move towards some fixes being applied at a policy level, partial reforms are unlikely to drag SA out of its current growth and employment trap. Consequently, we continue to face medium-term risks to social, fiscal and financial stability” he concludes.