SA Reserve Bank slashes growth forecast by 6.1% as Covid 19 hits economy

The South African Reserve Bank

JOHANNESBURG – The South African Reserve Bank (SARB) has slashed the country’s gross domestic product (GDP) growth forecast further, saying it now expected the economy to contract by 6.1 percent this year as a result of the Covid-19 impact.

Last month, President Cyril Ramaphosa announced a nationwide lockdown from midnight Thursday March 26, except for essential services, in order to curb the spread of the Covid-19 which has killed 27 people and infected more than 2 000 others to date.

SARB governor Lesetja Kganyago said the Covid-19 outbreak would have a major health and social impact, and forecasting domestic economic activity presented unprecedented uncertainty. “With that in mind, the bank expects GDP in 2020 to contract by 6.1 percent, compared to the -0.2 percent expected just three weeks ago. GDP is expected to grow by 2.2 percent in 2021 and by 2.7 percent in 2022.”

South Africa’s lockdown has been extended by an additional 14 days, bringing the total lockdown period to 35 days.

Kganyago said the supply and demand effects of this extension would reduce growth and deepen it in the short-term, as businesses stay shut for longer and households with income spend less. “This will likely also increase job losses, with further consequences for aggregate demand. The impacts will be particularly severe for small businesses, and individuals with earnings in the informal sector.”

This as the SARB, in an unprecedented move, brought forward its Monetary Policy Committee meeting for May to cut the repurchase rate by 100 basis points for the second time in as many months, taking the repo rate to 4.25 percent per annum.

The bank has been implementing a variety of measures to stimulate economic activity and inject liquidity to the financial markets which were severely hampered by the Covid-19 impact.SARB had last week forecast that the country stands to shed 370 000 jobs in the formal sector and 1 600 small businesses were likely to become insolvent as a result.

Finance Minister Tito Mboweni said the Covid-19 would certainly further deepen the South African downturn woes as the country was already in a recession going into this health care crisis. Mboweni said the National Treasury’s internal scenario planning had mapped out the economic impact of different lockdown scenarios, together with the consequent different paths for the fiscal deficit, for government borrowing and for the fiscal response.

“At this stage, our central scenario is for a deep recession in 2020, followed by a rapid upswing in economic growth,” Mboweni said.“Critically, the path relies on an understanding of how the global economy will adjust.”