South Africa’s Central Bank Sees Policy Space as Economy Shrinks
S. Africa’s Economy May Shrink as Much as 4%, Central Bank Says
(Bloomberg) --
South Africa’s central bank has the space to respond to turmoil from the coronavirus pandemic -- which could see the economy contract by 2% to 4% this year -- thanks to inflation that’s projected below the midpoint of its target range.
A 21-day nationwide lockdown aimed at slowing the spread of the pandemic will cut a further 2.6 percentage points off the rate of change in gross domestic product, the Reserve Bank said in its six-monthly Monetary Policy Review on Monday. The monetary policy committee projected in March, when it cut its benchmark rate by 100 basis points, that the economy would contract by 0.2%, but that was before the lockdown was announced.
“The Covid-19 pandemic is the biggest disruption to the global economy since the bankruptcy of Lehman Brothers in 2008,” the central bank said. “The South African Reserve Bank has space to respond, given that inflation is projected under 4.5% this year, and is likely to stay well within the target range over the medium term.”
The economy is stuck in its longest downward cycle since World War II, with rolling blackouts, and poor business and consumer sentiment weighing on growth. Uncertainty and downward shocks to economic prospects posed by the coronavirus mark “an inauspicious start to a new decade after the serial disappointments of the 2010s,” the central bank said.
The past decade was the worst for South African growth, with total output expanding by 15.9% between the first quarter of 2010 and the final quarter of 2019, central bank data show. That compares with 18.9% and 16.7% in the 1980s and 1990s when the former all-white government renewed a state of emergency and the country prepared for its first democratic elections.
The MPC cut its benchmark interest rate by the biggest margin in more than a decade last month to cushion the impact of the virus on an already fragile economy.
While monetary stimulus can help mitigate the economic costs of the Covid-19 shock by supporting the spending power of companies and households, it can’t make up for South Africa’s “significant pre-existing growth constraints,” the central bank said. “Better long-term growth prospects will therefore require a range of interventions, many of them outside the domain of the central bank.”
Wartime Levels
The coronavirus fallout could push the budget deficit to wartime levels by sapping revenue and potentially increasing spending requirements if the lockdown doesn’t effectively contain the rate of infections, the central bank said. The shortfall could exceed 10% of GDP this fiscal year, it said.
The largest shortfall on record was 11.6% of GDP in 1914, followed by 10.4% in 1940, according to the central bank. The Treasury projected a gap of 6.8% for 2020-21.
“This is a very early estimate,” Governor Lesetja Kganyago said in an online briefing, adding that it is based on the framework outlined in the government’s Feb. 26 budget review. “We can’t quite pinpoint it at this stage because we don’t know the extent of the lockdown.”
While the outbreak will test whether inflation expectations are resistant to shocks, there is a 92% probability that price growth will remain within the central bank’s 3% to 6% target range until 2022, said Chris Loewald, the head of the bank’s economic research department and a member of the MPC.
Weak demand is expected to exert downward pressure on prices, according to the Monetary Policy Review.
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