The South African economy is unlikely to fall into recession, the Reserve Bank said on Tuesday, predicting that second-quarter GDP growth would show some improvement, while cautioning that the risks to growth forecasts for the year were "to the downside".
Last week, Statistics SA reported that South Africa's gross domestic product (GDP) had contracted 0.6 percent quarter-on-quarter in the first three months of the year - its first contraction since the second quarter of 2009, when the world's economy dipped as a result of a global recession.
A second consecutive quarter of negative economic growth would, technically speaking, indicate that the country had entered a recession.
Releasing its latest Monetary Policy Review on Tuesday, the central bank noted that a number of adverse supply shocks, particularly from strike action as well as from electricity shortages, had led to negative first-quarter growth.
"Although the second quarter is expected to show some improvement, the risks to the 2014 forecast are to the downside," the Bank said. At its monetary policy committee meeting in May, the Bank revised its growth forecasts for 2014 down from 2.6% to 2.1%.
According to the Review, inflation is projected to come in above the bank's 3% to 6% target range for an extended period of time. In April, the Consumer Price Index (CPI) came in at 6.1%.
"Overall, inflation in South Africa is projected to be above target for an extended period of time, with risks tilted towards higher inflation. Over the longer term, this necessitates higher interest rates, and therefore a tightening cycle."
The bank hiked interest rates at its first meeting of the year in January.
"However, with domestic economic growth weak, and world inflation and interest rates remaining low, monetary policy tightening is likely to be moderate. This will provide continued support to the economic recovery," the Review states.
The review found that household expenditure has limited prospects for improvements in 2014 due to rising inflation, weak employment growth and muted wealth effects.
"Household expenditure will also be constrained by continued moderate credit growth, knock-on effects from the mining strike, and rate hikes, which raise debt service costs and disincentivise further borrowing."
The Bank expressed concern at the country's antagonistic labour relations and persistent strikes. "In particular, changes in the structure of mining unionisation over the past few years have caused multiple, often violent disruptions to production, the most recent example being the record-length and on-going platinum-sector strike.
"These events have been costly in several ways, depriving households of wage income and retailers of customers, damaging exports, and ultimately compromising investment and employment," the Review states.
The Monetary Policy Review, which reviews domestic and international developments that affect inflation and the Bank's monetary policy stance, is published twice a year.
