South Africa’s economy faced another challenging year in 2016, as soft commodity prices, slow domestic demand and an uncertain political outlook combined to limit growth, with prospects for the coming year expected to be only somewhat more positive.
Allegations of mismanagement by President Jacob Zuma and uncertainty over economic policy continued to impact growth through 2016, causing two leading ratings agencies to put the government on notice of a possible downgrade in the new year.
On November 25 Moody’s and Fitch issued statements saying that while there were leaving South Africa’s bond rating at “Baa2” and “BBB-”, respectively, the economy’s outlook had been revised to negative.
While leaving South Africa’s rating untouched, Fitch warned that continued political instability that adversely affects standards of governance, the economy or public finances could lead to a downgrade.
In its statement, Moody’s said the negative outlook recognised the downside risks associated with political uncertainty and low business confidence as well as the challenging external environment characterised by low growth, investment and trade.
Slow growth, weak demand
Low growth was also a factor in the central bank’s decision late in the year to leave its policy rates unchanged.
Citing weak demand, the South Africa Reserve Bank (SARB) held its key rates at its last monetary policy committee meeting for the year, in late November. The bank kept its repo rate at 7%, the same level as it has been since March, while the prime lending rate, as charged by banks, was maintained at 10.5%.
One factor that stopped the SARB easing rates was inflation. This began edging up in the fourth quarter, with the consumer price index running at 6.6% year-on-year (y-o-y) in November, according to data issued by Statistics South Africa (Stats SA) in mid-December.
That figure was the highest since the 7% recorded in February, at a time when food prices were being pushed up due to drought, and overshoots SARB’s projected full-year inflation range of 3-6%.
In late November Lesetja Kganyago, governor of the SARB, said it had revised its assessment for inflation, stating that while early in the year risks had been seen as being balanced, they were now moderately on the up-side.
Along with leaving its rates untouched, the reserve bank left its forecast for GDP unchanged, forecasting growth of 0.4% for 2016, with the economy set to gain pace with expansion of 1.2% and 1.6% over the next two years.
The SARB’s growth estimates are moderately higher than those of the IMF for 2016 and 2017, though for the following year, the two forecasts converge. In its “World Economic Outlook” report issued at the end of October, the IMF projected South Africa’s GDP would expand by 0.012% in 2016, rising to 0.79% the next year and 1.6% in 2018.
Mining and manufacturing output fluctuates
South Africa’s mining industry posted solid growth in August and September, with production up 10.6% and 3.4% y-o-y, respectively, according to a recent Stats SA report. However, this trend was reversed by a 2.6% contraction in October and a 4.2% decrease a month later.
Platinum metals led November’s slowdown, with output falling 10.8% y-o-y, while iron ore and gold posted decreases of 8.7% and 9.4%, respectively.
The industry was buoyed by an agreement brokered in October between industry majors and unions on pay increases to avoid strike action – something that in 2014 resulted in the loss of $2bn worth of production.
In terms of manufacturing output, data from Stats SA also shows fluctuations during the latter half of 2016, following a peak of 4.7% y-o-y growth in June. Recent figures show a 1.9% rise in production in November, largely thanks to the strong performance of basic iron and steel, non-ferrous metal goods and machinery products, which contributed one percentage point to expansion.
Unemployment, meanwhile, grew in the latter part of 2016, reaching 27.1% of the workforce as of September, up from 26.6% in the second quarter. The fall in employment levels saw 5.9m South Africans out of work – an increase of 300,000 in three months – bringing the jobless rate to its highest level in 13 years.
While 288,000 jobs were added in the third quarter, the number of new workers entering the workforce did not compensate for those leaving it. The strongest growth was seen in the construction and agriculture sectors, which saw 104,000 and 56,000 new positions created, respectively.