SOUTH Africa’s economic growth for 2021 has been revised lower due to the larger negative effect on productivity than was previously estimated from the July unrest and other factors as a hawkish SA Reserve Bank (SARB) hiked the repo rate for the first time in three years.
The SARB on Thursday forecast that the economy would grow by 5.2 percent this year, down from 5.3 percent it estimated in September.
This was mainly due to the negative growth of 2.5 percent expected in the third quarter as the July civil unrest wiped at least R50 billion off the economy.
SARB governor Lesetja Kganyago on Thursday painted a bleak picture of the economic outlook.
Kganyago pointed to the electricity crisis, worsening terms of trade and low domestic investment as factors that would hamper growth this year.
“The July unrest, the pandemic and ongoing energy supply constraints are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns,” he said.
“Investment will remain constrained by the high risk of further load shedding and ongoing uncertainty. The faster vaccine roll-out presents some upside risk to the growth outlook.”
The SARB’s gross domestic product forecast for 2021 is in line with the National Treasury’s forecast of a 5.1 percent economic growth this year as Eskom’s rotational power cuts weigh on growth.
The bank also said the economy would grow by a mere 1.7 percent in 2022 and maybe by 1.8 percent in 2023.
Momentum Investments economist Sanisha Packirisamy said the markets were also not optimistic about growth.
“The market expects the widespread looting and riots to have have plunged growth into negative territory in the third quarter of the year,” she said.
Meanwhile, escalating inflation drove the SARB to be hawkish and tighten its monetary policy for the first time in three years in a bid to control rising food, electricity and transport prices.
In a split decision, the Sarb lifted the repurchase rate (repo rate) by 25 basis points to 3.75 percent, triggered by the risky outlook on inflation over the medium term.
The prime lending rate of commercial banks now rises to 7.25 percent.
The SARB also revised the headline forecast slightly higher to 4.5 percent in 2021 and 4.3 percent in 2022.
FNB chief economist Mamello Matikinca-Ngwenya, however, said they projected headline inflation to normalise from an average of 3.3 percent in 2020 to 4.5 percent in 2021.
“This should allow for a gradual hiking cycle by the SARB - we currently expect a further 125 basis points cumulative increase in the repo rate by 2023,” she said.
“Notably, however, risks to our inflation outlook are biased to the upside.”
The bank’s implied policy rate path of the Quarterly Projection Model (QPM) indicated an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024.
The move toward monetary policy normalisation comes amid increasing concerns around rising global inflation on higher global fuel prices, with fuel price inflation at 17.6 percent.
Anchor Capital’s co-chief investment officer, Nolan Wapenaar, said the Monetary Policy Committee was taking the view of rather one hike now than multiple hikes in the future.
Wapenaar said the SARB was thinking along the lines of one hike per quarter for 2022 and possibly beyond.
“This is dependent on how both inflation and the economy perform over the coming months,” Wapenaar said.
“Our view is that the softer local economy will slow inflation next year and that a further three hikes are to be expected in 2022.”
Despite the rate hike, the rand depreciated against the dollar and other major currencies, sliding to R15.73/$1 just after the SARB statement.
BUSINESS REPORT ONLINE