World Economy

S. Africa Stuck in Low Growth Trap

S. Africa Stuck in Low Growth Trap
S. Africa Stuck in Low Growth Trap

South Africa’s economy will avoid a recession in 2016 but remains in a low growth trap and is likely to see economic expansion forecasts revised lower, Finance Minister Pravin Gordhan said on Tuesday.

The treasury’s February estimate of 0.9% growth in 2016 was likely to change by the time of the October medium term budget, Gordhan told a media briefing on the sidelines of an investment summit on Tuesday, Reuters reported.

The central bank last week cut its growth forecast to 0% for 2016.

South Africa cannot rely on austerity measures to reduce public debt and boost economic growth, as previously thought, Gordhan said.

He said that he has been trying to find a balance between reining in spending to contain South Africa’s budget deficit and avoid credit rating downgrades, while also finding ways to boost economic growth and provide basic services to the poor.

“What’s very clear is that austerity, which we in some parts of the G20 thought was absolutely necessary ... is no longer the answer,” he told business leaders.

“In South Africa, as well, we have some austerity fans amongst our public commentators and it’s time to rethink.”

Africa’s most developed economy is barely growing after a drop in commodity prices crippled the mining sector, a severe drought hammered farming output and policy uncertainty spooked investors.

Gordhan said he was concerned about South Africa’s volatile labor market, which has been plagued by strikes and above-inflation wage demands despite a barely growing economy.

Gordhan told a bankers conference that he was however happy that the situation seemed to be stabilizing.

Wage negotiations are taking place in the power, automotive and mining sectors, with initial demands ranging from 13 to 20% while inflation stands at 6.3%.

  Continent Resilient

Economic growth across the continent remains resilient but figures are likely to come in at their lowest in five years.

This is according to Ernst & Young’s Africa attractiveness survey. Although foreign direct investment projects fell, foreign direct capital investment into the continent surged.

The EY survey saw over 500 global business leaders, in over 30 countries, give their views on the potential of the African market. It reports that although Africa faces a lower growth forecast, the continent remains resilient.

Sub-Saharan Africa will still experience the second highest economic growth rate in the world this year.

Last year the region became the leading recipient of capital investment. However, the value of funds invested in African projects declined to R1-trillion ($6.94 billion). In 2014, the investment was R1.27 trillion).

Nigeria, the continent’s largest economy, has slowed down in growth. It was further affected by the decline in the oil price and currency devaluation pressure.

South Africa, the second largest economy in Africa, has been hit by stagnant growth this year, but has managed to avoid downgrades by ratings agencies.

Economic growth across the region is expected to remain slower compared to the past 10 to 15 years.

North Africa experienced 8.5% year-on-year growth in FDI projects.

  Shift in FDI

The report also notes that over the past 10 years, there’s been a shift in sector focus in FDI from extractive to consumer-facing industries.

Mining and metals, coal, oil and natural gas, which were previously the key sectors attracting major FDI flows, have given way to consumer products and retail.

South Africa’s economy needs to start expanding, and by a much higher rate, if it hopes to make any dent in poverty, says local economist Dawie Roodt.

Projections for South Africa’s economy have gone from bad to worse with the South African Reserve Bank last week predicting 0% growth for 2016.

This comes after the International Monetary Fund cut its 2016 growth forecast for South Africa from 0.6% to 0.1%.