The weak GDP growth numbers assumed for the first quarter could push South Africa into recessionary conditions much sooner than initially projected.
Thea Fourie, senior economist at IHS Global Insight, says it now appears as if the sharp fall in international commodity prices since end-2014 and the impact of dry El NiƱo weather conditions, combined with there being very little policy space to support economic growth, is paving the way for a recession.
This is worrying for South Africa’s jobs market, with latest statistics already showing the country’s unemployment rate reaching 26,7% in the first quarter, while a credit risk downgrade by Standard and Poors (S&P) will be hard to avert in 2016.
Growth momentum is unlikely to show any turnaround in the near term, comments Fourie. Consumer spending, accounting for more than 60% of GDP, is highly unlikely to improve.
A higher interest rate burden, a larger tax obligation since no provision was made for fiscal drag in the latest budget, ongoing price pressures for essential non-substitutable goods such as food, and a challenging jobs market set the stage for significantly weaker consumer spending during 2016.
South African companies’ net operating surplus growth rate has been trending down since 2012, but showed a contraction of 1,8% year on year in 2015, the first actual decline since the 1980s.
Companies will increasingly be compelled to improve their bottom lines, either by hiking prices or shedding jobs during the year, says Fourie. Either way, this is negative for South African consumers, but also for the prospects of investment in the private sector.
Some appropriately directed private-sector investment that goes hand-in-hand with large government concessions, particularly in the motor vehicle industry, and green energy private investment fall outside IHS’s latter expectation.
The low-growth outcome will most definitely weigh on South Africa’s sovereign risk ratings, scheduled for assessment by S&P and Fitch during June, Fourie adds.
IHS maintains the view that a credit risk downgrade to sub-investment status remains a material risk for South Africa. A cut in the country’s investment rating could force a sell-off of domestic financial assets.
Although the South African financial market is sophisticated enough to absorb most of any sell-off, capital outflows could place pressure on the country’s foreign reserve holdings and require a more decisive policy response by the country’s central bank to shield economic fundamentals against additional outflows.
This likelihood, combined with the prospects of higher inflation towards year-end, will intensify the central bank’s dilemma of either risking recession or allowing higher price pressures and declining foreign reserves in the economy.