Growth will slow sharply in 2016, rebounding only slightly in 2017. We expect household expenditure growth to collapse, while government expenditure growth decelerates on the back of fiscal consolidation and gross fixed capital formation growth also slows given continued policy uncertainties.
We believe that the South African Reserve Bank (SARB) will tighten rates by another 50 basis points (bp) to 7.5% in Q3, given three sources of upside pressures on inflation: 1) the second-round effects of food price inflation, 2) exchange rate depreciation and an increased pass-through from the exchange rate to inflation and 3) a recovery in oil prices.
We expect South Africa's current account deficit to narrow marginally to 4.0% of GDP in 2016 from 2015's 4.4% as the trade deficit continues to narrow following the Q1 bottom in commodity prices. Given lower current account deficit financing needs and continued policy instability, we expect limited inflows of portfolio and foreign direct investment in 2016 after Q415 saw posted outflows.
The ANC will ramp up its populist rhetoric in the run-up to the 2016 municipal elections. Land reform in particular will resonate with the voters which the ANC is losing to the Economic Freedom Fighters. Yet the ANC is likely more preoccupied with Zuma's succession, as Nkosazana Dlamini-Zuma is displacing Cyril Ramaphosa as the strongest contender for the ANC leadership.
Major Forecast Changes:
We have revised down our forecast for South Africa's 2016 real GDP growth, from 0.7% to 0.5%. This would imply a more-than-halving of real GDP growth from 2015's 1.3%. Growth in Q116 was slower than we had anticipated. Meanwhile, slower growth in Europe due to the Brexit will also pose headwinds to the South African economy, weighing on financial market stability, and further tempering investment and trade.
While the electricity situation has stabilised in the short term, in line with reduced demand driven by the economic slowdown, it is unclear how bad the electricity situation will be over the next few years as the current operational stability masks unresolved structural failures. In a worst case scenario where the domestic grid collapses, we would significantly revise down our growth forecast.
|Nominal GDP, USDbn||350.0||312.7||272.8||295.8|
|Real GDP growth, % y-o-y||1.6||1.3||0.5||1.2|
|Consumer price inflation, % y-o-y, eop||5.3||5.2||6.9||6.0|
|Exchange rate ZAR/USD, eop||11.55||15.48||15.90||15.85|
|Budget balance, % of GDP||-3.6||-4.0||-3.5||-2.4|
|Current account balance, % of GDP||-5.4||-4.4||-4.0||-4.4|
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