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South Africa's GDP revised downwards.

South Africa's Gross Domestic Product (GDP) is expected to come in at 0.9 per cent in 2016, reflecting the impact of the current drought and depressed global conditions.

This is according to Finance Minister Pravin Gordhan who tabled the 2016 Budget during a joint sitting of the National Council of Provinces (NCOP) and the National Assembly, in Parliament, on Wednesday.

"The Treasury currently expects growth in the South African economy to be just 0.9 per cent this year after 1.3 per cent in 2015. This reflects both depressed global conditions and the impact of the drought," Minister Gordhan said.

The country's GDP growth forecast for 2016 has been revised down from an estimated 1.7 per cent at the time of the Medium Term Budget Policy Statement (MTBPS).

Minister Gordhan said growth of 0.9 per cent reflects policy uncertainty, the effect of protracted labour disputes on business confidence, electricity constraints and regulatory barriers to investment.

In the Budget Review, National Treasury noted that lower rates of economic growth reduce government revenue, undermining the state's ability to sustain spending on core social and economic programmes.

The review noted that South Africa's most severe drought in 20 years has resulted in declining agricultural output and food price inflation, raising the prospect of increased hunger and poverty across Southern Africa. In addition, constrained electricity supply continues to limit growth and deter fixed investment.

However, the country's GDP growth rate is expected to recover gradually over the medium term as electricity availability improves and confidence returns.

GDP growth is expected to improve gradually to 1.7 per cent in 2017 and 2.4 per cent in 2018.

"But without action to restore confidence in fiscal sustainability, the recovery risks being cut short as deteriorating conditions create a vicious cycle of lower growth, declining incomes, rising inflation, capital outflows, further currency depreciation, rising interest rates, and falling investment and consumption. This is the predicament that Brazil finds itself in today, after years of social and economic progress," noted the Budget Review.

In his address to Parliament, Minister Gordhan noted that South Africa's institutional foundations of the economy remain resilient with an effective macroeconomic policy. In addition, the inflation targeting framework provides an anchor for price and wage setting while the country's banks and financial institution are well capitalised.

"We are resilient, we are committed, and we are resourceful. We know how to turn adversity into opportunity," said Minister Gordhan.

He added that government is resolved to restore the momentum of growth and to ensure that it is inclusive and sustainable.

Inflation

Meanwhile, consumer inflation that averaged 4.6 per cent in 2015 has resumed an upward trajectory in response to rising food costs and sustained increases in administered prices.

To date, the knock-on effect of rand weakness has been muted. Administered price inflation excluding petrol remained elevated at 8.4 per cent in the second half of 2015, from an average of 6.5 per centin the first half of the year.

Due to the deteriorating inflation outlook, the Reserve Bank has progressively raised the repo rate to 6.75 per cent from 5.75 per cent in February 2015.

Higher food prices and exchange rate depreciation have contributed to the higher inflation forecast for 2016, as businesses are expected to pass the costs of a weaker rand on to consumers more than in the recent past.

- SAnews.gov.za

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Publication:CPI Financial
Geographic Code:6SOUT
Date:Feb 24, 2016
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