Banking group Absa Capital, which has typically maintained a more optimistic view of South Africa's growth prospects than many other commentators, has not only lowered it growth forecast for 2011 and 2012, but is also now cautioning that the downside risks to it's current 'baseline' have increased materially.

The bank’s macro and fixed-income research head Jeff Gable also indicated on Thursday that, while the bank was not yet convinced of the need for additional stimulus to ward off the current growth threats, the country’s monetary and fiscal policymakers would likely be more responsive to the near-term threats to growth and employment than to the risks posed by higher inflation and the weaker rand. But he also did not expect the recent rand weakness to be sustained and was forecasting that the currency would end the year at around R7.45 to the US dollar.

The Barclays Capital-affiliate now expected that South Africa would grow 3.1% in 2011, instead of its earlier forecast of 3.9%. If also trimmed its baseline outlook for 2012 to 3.4%, from 4.1%. Gable warned that the bank expected paltry third-quarter growth of 1.3%, owing partly to the industrial action that took place during the period.

South Africa, which began the year strongly with quarter-on-quarter gross domestic product (GDP) growth of 4.5% in the first quarter, slumped to a rate of only 1.3% in the second. Absa Capital was currently modeling a quickening in growth to 2.5% in the final quarter of the year. However, other commentators were less optimistic, owing to the fact that the period coincided with the Christmas holiday season, during which many businesses close.

Lead South Africa economist Gina Schoeman said that the recent quarterly GDP data had been influenced by material swings in the performance of the manufacturing sector, which expanded strongly in the first quarter, but had since slumped. Falling confidence and activity in the sector, together with the recent industrial action, had played a major role in the bank’s decision to downgrade its outlook.

STIMULUS FIREPOWER

The slower growth outlook was also likely to consolidate the current shift in focus of monetary policymakers from fighting inflation to stimulating growth. Therefore, Absa Capital was not anticipating any new hike in interest rates until the fourth quarter of 2012 at the earliest, despite the fact that it anticipated that inflation would move out of the 3% to 6% target band during the coming months.

Similarly the fiscal authorities were likely to also be considering possible stimulus measures in response to the current risks, particularly the potential slowdown effects precipitated by the current eurozone crisis.

This view appeared to be in line with recent sentiments expressed by Finance Minister Pravin Gordhan and the need to possibly sustain fiscal support, particularly for infrastructure spending.

“The challenge that is facing all of us around the world, is that the normal recovery is not happening . . . and given the abnormality, if you like, and the tumultuousness within the recovery, the question is how do you then manage fiscal credibility . . . and how do you ensure that your economy grows so that you can also generate revenue. That is the mix that some countries aren't getting right. I’m not sure how we are going to manage those dynamics . . . but that is part of the challenge that we face,” the Minister noted in a briefing on the outcomes of the recent International Monetary Fund-World Bank meetings in the US.

Gordhan is expected to provide additional insight into South Africa’s fiscal response in the upcoming Medium-Term Budget Policy Statement, which was due for release on October 25.

Gable indicated that South Africa was in the relatively fortunate position of still having fiscal and monetary firepower. “South Africa is not, today, in the position that many of the countries in Europe and several rich countries in the world are, where their ability to push harder on either side of stimulus [monetary or fiscal] is very much diminished.”

South Africa might not want to loosen its monetary and fiscal policies as sound macroeconomic management had allowed the country to avoid the worst of the crisis. “But it would be wrong, to my mind, to think that South African policymakers would sit on their hands when faced with a significant further deterioration in the outlook.”

But both Gable and Schoeman emphasised that any fiscal stimulus measures should be targeted towards spending that enhanced growth, which was difficult to achieve given South Africa’s limited capacity to actually deliver on capital programmes.

“Increasing social support programmes and increasing the size of the cheaques going out would not be an example of countercyclical support . . . but infrastructure is an easy answer,” Gable averred, noting that such investment programmes would be supportive of future growth prospects.

“So to the extent that you can turn your infrastructure plans into actual infrastructure projects, gosh, the more the better.”

Gable even argued that, given the low interest-rate environment, “the cost of providing stimulus globally . . . is quite modest.”

“Our base view is that we don’t think we are at the point yet where additional stimulus is necessary. But there are clearly very substantial risks coming from the global economy. If those risks move from risks to ‘baseline’ that’s going to be ugly globally and here, and the notion that our policymakers are forced to sit on their hands because they don’t have powder dry is too narrow a view,” Gable said.