South Africa

South Africa’s economy remains stuck in low gear

CAPE TOWN – Moody’s rating agency said on Monday that it expected South Africa’s full-year growth to average 0.3 percent after the country’s economy contracted on a quarterly annualised basis by 0.6 percent in the third quarter of 2019.

Moody’s said in its Global Macro Outlook that high-frequency indicators such as industrial production and the purchasing managers index (PMI) indicated that industrial activity remained weak. Business and consumer sentiment has also declined over the last two years. And per capita real gross domestic product (GDP) has shrunk every year for the last five years. 

Moody’s said the steady rise in the unemployment rate since 2018, which now stands at 29 percent, reflected the difficulties in absorbing the growing labour force. The slow growth of economic activity is hampering the rate of jobs creation.

“We attribute the persistent economic weakness to lacklustre domestic private-sector demand — both household spending and investment — and the detrimental impact of widespread power outages on the manufacturing and mining activity. 

“The South African Reserve Bank marginally reduced the policy interest rate in January. The rate now stands at 6.25 percent, 75 basis points below the high in the current cycle of 7 percent in mid-2016. However, monetary policy, which is primarily focused on meeting the central bank's inflation target objective, remains tight. 

“As a result, the value of the rand in real trade-weighted terms has held up even as the economy has decelerated sharply. However, the real policy rate exceeds 2 percent, well above the real GDP growth rate. In other words, real interest rates remain high, constraining the pace of real economic activity,” stated Moody’s report.

Moody’s forecast South Africa’s economy to grow 0.7 percent in 2020 and 0.9 percent in 2021. “Our sub-1 percent projections reflect our view that the pace of economic activity will remain subdued, well below the country’s potential, over our forecast horizon.”

The rand weakened to R15.02 a dollar, R16.28 a euro and R19.54 a pound, as Moody’s lowered its economic growth expectations.