S. Africa: Growth to accelerate, but recovery won’t last

After a grim 2016, growth in South Africa will recover more quickly than most expect, reaching 2.0% in 2017 and 1.7% in 2018. But this would still be a woeful outcome for a country at South Africa’s income level. And we expect that growth will slow further in 2019. Before examining how South Africa’s economy will perform over the coming years, it’s important to understand what caused growth to slow to a crawl in 2016. Discussions of South Africa’s economy often centre on its many structural problems, including a low investment rate and persistently high unemployment. All are serious issues. But there’s little reason to believe that any got much worse in 2016. Moreover, while supply-side problems put an upper bound on growth, this notional ‘speed limit’ is irrelevant when growth is already running significantly below potential. The recent slowdown was partially driven by a one-off supply shock: a serious drought hit agricultural output, pushing up inflation and dampening consumer spending. Ebbing business confidence and tighter fiscal and monetary policy also depressed domestic demand. By our estimates, weak demand has opened up an output gap of about 1.5% of potential GDP, creating scope for a short period of above-trend growth. We expect that things will turn around in 2017. The agricultural sector looks set for a strong recovery, removing a key drag on growth. Improved agricultural output will feed through into stronger consumer spending by both boosting rural incomes and reducing national inflation.