Dr. Azar Jammine, Chief Economist Econometrix, provides his outlook on 2014.
Expert Opinion: Economy 2014
The state of the South African economy over the past year turned out to be somewhat weaker than had been hoped for this time last year. In part, this may have been attributable to the fact that global economic growth, especially in the first half of 2013, turned out to be softer than previously anticipated. Given the high correlation between the performance of the South African economy and the global economy, this impacted negatively on South Africa's real economic outcomes. However, South Africa's economic performance seems to have deteriorated in its own right over and above the reduction in global growth. This can be attributed to a loss of business confidence.
An unexpectedly sharp depreciation in the Rand's exchange rate was also instrumental in damaging business confidence. Furthermore, it increased inflationary pressures, creating downward pressure on disposable income and making it more difficult for the man in the street to keep his head above water.
Should some of the factors contributing towards the decline in business confidence be overcome in the coming year, the economic outcome for 2014 should turn out to be slightly better than that of 2013. Consensus forecasts are looking for economic growth at or just under 3%, compared with levels of growth 1.9% in 2013. One of the important factors, which provides optimism is the indication that global economic growth may be picking up momentum. This improvement is largely attributable to the continuation of very loose monetary policy in the US. Together with a much more competitive environment for South African exporters following the 20%-odd depreciation of the Rand in the past year, the potentially more favourable global economic environment ought to help boost exports and through this, overall economic growth.
We should like to believe that the Rand will not depreciate substantially any further. Although the Rand is vulnerable to further depreciation in the short term and could even fall to as much as R12 to the Dollar, we do not believe such a spike in the currency will be sustained. Our year-end forecast therefore remains basically unchanged at around R10.80 to the Dollar.
What the occurrence of a downward spike in the exchange rate is set to achieve is to push inflation upwards considerably higher than previously anticipated. However, in order for inflationary pressures to be brought under control, we believe there is a good chance now that the Reserve Bank will be obliged to raise interest rates by at least another 100 basis points (0.5% increases in the repo rate in each of the next two MPC meetings, in March and May).
About the author
Dr Azar Jammine
Director and Chief Economist, Econometrix
Dr Azar Jammine is a well-recognized and respected economist – with over forty years of experience, Dr Jammine has established himself as one of the foremost economists in the country. He is Chief Economist at Econometrix and a regular commentator on economic events in the media.