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Absa revises GDP forecast on better-than-expected data

4th August 2020

By: Donna Slater

Features Deputy Editor and Chief Photographer

     

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Based on better-than-expected data arising from the first and second quarters of the year, financial services company Absa has revised down its forecast for the gross domestic product (GDP) contraction this year from 9.7% previously, to 8.3%.

However, Absa notes that taking into account the recent escalation in new Covid-19 cases, it now believes the economic recovery in the second half of the year will likely be slower than it previously expected as a result of extended lockdown measures and more localised disruptions to activity from ongoing Covid-19 outbreaks.

In addition, second-half performance will also be impacted by a large negative demand shock from job losses and the expiration of some of government’s economic relief initiatives.

As for 2021, Absa forecasts a partial recovery of 2.4%.

Absa states that the Covid-19 pandemic has triggered the biggest economic shock in decades, and is expected to leave lasting effects for many years. In this regard, it points out that, according to the June 2020 Global Economic Prospects report, the baseline forecast envisions a 5.2% contraction in global GDP this year, using market exchange rate weights.

This equates to the deepest global recession in decades.

Further, the International Monetary Fund, which recently approved a $4.3-billion loan to South Africa, expects the country’s GDP to contract by 7.2% this year.

Absa explains that South Africa’s already strained public finances will, going forward, remain under immense pressure, noting that in the Supplementary Budget presented in June, the National Treasury projected a main budget deficit of 14.6% of GDP (equivalent to a primary deficit of 9.7% of GDP) for the 2020/21 financial year.

In this regard, Absa believes the outcome is likely to be worse and projects a main budget deficit of 16.6% of GDP.

Finance Minister Tito Mboweni has signalled a plan to achieve a primary balance in the 2023/24 financial year, which will require expenditure cuts of R230-billion in the next two fiscal years, over and above the planned R160-billion wage bill cuts.

However, Absa notes in a statement that it is doubtful that cuts of this magnitude can be achieved.

In terms of inflation, Absa says it is currently contained and will likely remain so for some time given the large negative demand shock to the economy.

Based on Absa's July research assumptions, it forecasts a contraction in the G7 countries’ (UK, US, Japan, Germany, France, Italy and Canada) GDP of 5.4% for this year, and growth of 3.8% in 2021. It also forecast that China’s GDP growth will be a modest 0.8% for this year and 5.2% for 2021.

Absa forecasts that Brent crude oil prices will increase to $42/bl this year and rise to $47/bl in 2021.

In terms of commodities, Absa forecasts gold to average $1 688/oz for the remainder of the year, increasing to about $1 736/oz in 2021, while platinum will average $841/oz this year and increase marginally to $857/oz in 2021.

Absa also forecasts that coal will average $63/t this year, rising to $57/t in 2021.

It also predicts marginal growth for iron-ore, at an average of $91/t for the remainder of this year, and $92/t in 2021.

For these non-oil commodities, Absa notes that South Africa's key export commodity prices have remained relatively well supported despite weaker global economic activity.

As for food prices, Absa forecast that for the remainder of this year, price inflation will average 4.2%, increasing to 4.4% in 2021 and 4.5% in 2022. The prospect of a bumper harvest this year will likely help to keep overall food price inflation relatively contained.

Absa and the South African Reserve Bank expect the negative GDP output gap to persist over the forecast horizon, with Absa forecasting potential growth for the remainder of this year to be -2.2% and 2.3% in 2021.

Absa also forecasts another repo rate cut of 25 basis points in September, to 3.25%.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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