In the week before the national budget the Bureau for Economic Research (BER) at the University of Stellenbosch predicted economic growth of below 4% for the year, but believed it unlikely that South Africa would slip into recession.

BER economists forecast that South Africa’s power crisis and the looming US recession would snarl the country’s economic growth to levels between 3.4% and 3.9% for 2008, recovering to 4.8% in the following year.

On the same day at a media briefing in Parliament, Minister of Trade and Industry Mandisi Mpahlwa said his department will ensure that programmes hampering the economy of the country are dealt with this year.

The BER said that although it was tricky to tell at present what state-owned power utility Eskom’s shortcomings might have on economic growth, it was working with two scenarios – a “baseline” scenario and an “alternative” one.

The first scenario predicted that mining output would take a 20% knock in the first quarter, but would “almost fully” recover in the subsequent quarters.

This followed Eskom’s now internationally notorious January 24 letter to the major mining companies in South Africa warning them that it could not guarantee them power, leading to a week-long industry-wide shut down. The result was millions of rands worth of production losses.

Since then, the struggling power provider has told these companies that they could use 90% of their normal power consumption.

Mpahlwa told the media about his department’s plan to embark on an intensive campaign to halt the power outage crisis that almost crippled the country.

“As a country we cannot communicate a message that we are not suitable as an investment destination for the kinds of investments that require energy.”

To what extent the country’s economic wellbeing depends on the success of such plans was underscored by what was said at Stellenbosch.

The BER said that if the baseline outlook proved true, the gross domestic product (GDP) growth in 2008 would slow to 3.9%, with mining output sliding by 1.6%.

However, if its “more negative” alternative scenario came to fruition, a 4.8% blow to mining production would put the brakes more harshly on economic growth, which would then only reach 3.4% for the year.

BER economists, however, also warned that “even the alternative scenario may prove to be too optimistic”.

“In both scenarios, GDP growth is forecast to recover to 4.8% in 2009,” BER said.

Government during recent years had set a target of reaching 6% growth by 2010, but various spokespeople had since conceded that present circumstances made this seem unlikely.
The BER also predicts that government ambition to restrict inflation to levels below 6% is also unlikely to be realised.

While South Africa’s consumer price inflation index (CPIX) would average at 7.4% in 2008, it would peak at 9% this month, before easing to an average of 5.8% over 2009, they predicted.

This was significantly outside government’s target range of 3% to 6%.

But it did not follow automatically that this would spill over into interest rate hikes.

“The BER view is that interest rates are likely to remain unchanged for the rest of 2008,” it said.

The BER was also not very optimistic about the future of South Africa’s already gaping foreign account deficit, saying that it would remain large, with the potential for even further deterioration. “At this stage, it is unlikely that the inflows will be sufficient to finance the current account shortfall in 2008 and 2009,” a senior BER economist said.

The BER pegged the rand weakening to an average of R7.80 to the US dollar over the last quarter of this year, and to R8.30 in the next three months.

Despite all the bleak news the BER said it regarded “the possibility of a recession as being low.”

On the energy crisis Mpahlwa said there was a need for proper planning and coordination to ensure that the power crisis in the country is dealt with and that there was constant communication between government and Eskom in an effort to address the problem.

He said plans were afoot to deal with the issue of skill shortages that has hit the country. He said the country’s universities were planning on producing up to 2 000 engineers a year.

He also announced that plans are under way for his department to write new competition legislation.

Piet Coetzer