South African economy continues to face headwinds; economy likely to stagnate in 2016

At present, significant headwinds are being faced by the South African economy. The economy grew just 1.3 percent last year, while the outlook for this year has deteriorated further. The real GDP in the first quarter shrank 0.3 percent q/q, whereas in the last four quarters the real GDP has decreased 0.5 percent overall. The GDP had growth just 0.2 percent per quarter in the second half of 2015, while the economic output stagnated in the first half of 2016.

The South African economy is facing recession. A positive growth rate can be anticipated this year only if the real economy kicks off immediately, said Commerzbank in a research report. The South African economy is most likely to stagnate in 2016, added Commerzbank.

In the first quarter, the economy recorded weak mining as well as a decline in fixed capital formation due to low commodity prices. The investor confidence is being weighed on by the uncertainty due to political turmoil in the country. After the recent slight recovery in commodity prices, a solution for the internal political situation would be required for a firmer growth next year.

“We currently expect a rather low growth of 1.5% for next year. In 2011 GDP growth in South Africa still amounted to above 3% but has since fallen continuously”, according to Commerzbank.

Risks on the downside for the South African economic outlook continues to be high because of the general challenges faced by the emerging market nations and declining growth amongst key trade partners, especially China. Furthermore, low commodity prices have resulted in decline of export revenue. The aim of finance minister Pravin Gordhan to cut the budget deficit is becoming additionally difficult. The international rating agencies are more than expected to downgrade the country’s sovereign rating.

Meanwhile, the slowdown in the economy has not resulted in lower inflation. Consumer price inflation in the country has accelerated above the upper bound of the central bank’s inflation band. It has risen above 6 percent. The SARB responded to the increasing price pressure by hiking rates by 50 basis points at the end of January and 25 bps in mid-March.

According to the latest data, the consumer price inflation in the country reached 6.1 percent in May, a deceleration from April’s 6.2 percent. This has provided the SARB room to keep the rates on hold to underpin the economy. The South African Reserve Bank’s Monetary Policy Committee kept the rates unchanged at 7 percent.

The SARB has been compelled to hike rates, although to a limited extend, in spite of the economic slowdown. Currently, the markets project the central bank t o further raise rates by 75bps-100bps in 2016. But this is not expected to help ZAR appreciate sustainably as real interest rates in the country continue be low as compared with the majority of emerging market nations, noted Commerzbank. The South African central bank continues to be hesitant to hike rates markedly. Furthermore, there is likelihood that it will accept limited depreciation of the rand as its outlook already contains it, added Commerzbank.