OUTLOOK: Economy to grow 0.7% and Interest Rates to drop further in 2017

South Africa’s economic growth is expected to rebound in 2017, but will remain below 1%, according to BMI Research. The Fitch Group company has revised down the GDP growth forecast from 1% to 0.7%. Challenges to growth include higher unemployment, lower consumption and limited government spending due to fiscal consolidation. Policy uncertainty and a “poor operating environment” will also discourage investment, the research said. BMI expects the fiscal deficit to narrow, but at a slower pace than expected as the weak economic growth will limit fiscal revenue.

Although economic growth activity in the mining and agricultural sectors drive growth during the first quarter, this may be counteracted in the second quarter with commodity prices falling. Coupled with recent less business friendly rhetoric and policy (not least the new mining charter), this will weigh on investment to an even greater extent than we had expected, and temper growth,” the report read.

h3. Policy Uncertainty

With the run-up to the ANC elective conference in December, BMI expects President Jacob Zuma to lean towards the left in terms of policy decisions in order to gain support. “Should this be the case, we could see significant fiscal slippage and continued more populist rhetoric by the president, presenting downside risks to investment but upside risks to government consumption.”

There recently held ANC policy conference was characterised by deadlocks on key policy decisions, including the mining charter and land reform. Financial services company Credit Suisse is of the view that debates on policy will continue until the elective conference and may include more radical proposals. BMI highlighted that the risk of a downgrade of local currency debt remains a concern. This would see capital outflows, result in the weakening of the rand and raise borrowing costs. A downgrade would add weight to the already low business confidence.

Analysts previously stated that Finance Minister Gigaba’s 14-point plan to revive the economy lacks the “profound change” needed to boost confidence as it intends to do. Gigaba also stated that he welcomed a commission of inquiry into state capture of state-owned enterprises in an effort to restore investor confidence and address investor perceptions.

h3. Rate Cuts

BMI forecasts a rate cut by 25 basis points before year-end and another cut in 2018. “Our expectations for stagnating economic growth and cooling inflation will give the bank room to shift to a policy of monetary easing.” But BMI said that a rate cut would only happen at a gradual pace. Economists are of the view that although recessionary conditions and low inflation would prompt a rate cut, the currency is still at risk to shocks by a rate hike in the US and other political uncertainty locally.

Economist Kevin Lings said that the economy is still vulnerable to investor sentiments. He expects a two rate cuts of 25 basis points over the next six to nine months. Economist Annabel Bishop said that even though the hiking cycle is over, the Reserve Bank will move carefully and may be more dovish in the second half of the year.

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