Markets Daily: Growth forecasts and the pace of fiscal support withdrawal

Published on   October 12th, 2020   |   by   Isaah Mhlanga

Markets Daily: Growth forecasts and the pace of fiscal support withdrawal

The range of forecasts for South Africa’s economic growth are wide, but there is some consensus on how bad the contraction will be. The most optimistic of the forecasts is for a 7.2% contraction in 2020 from the National Treasury’s Adjustment Budget in June and the World Bank’s forecast released last week. Admittedly, the National Treasury’s forecast will likely be revised in the Medium-Term Budget Policy Statement (MTBPS) on the 21st of October. The Bloomberg consensus is at -7.6% while the Reuters consensus is at -8.0%. The International Monetary Fund projects a contraction of 8.0%. The most pessimistic is the Bureau of Economic Research at Stellenbosch University with a forecast of -8.7% followed by the SARB at -8.2%. On average, the expected contraction this year is 7.9% before recovering to an average of 3.2% in 2021.

While noting that National Treasury’s forecasts are a little dated, it is a historical fact that Treasury’s forecasts in the last decade, and almost every other forecaster has been too optimistic. This has been in part, the source of too optimistic tax revenue forecasts and over budgeting based on those forecasts, which eventually get revised lower.

While forecasts are never certain, they need to be realistic for better planning. So far, we can make the following observations. The existing National Treasury Forecast is optimistic, which means that the tax revenue projections will likely be revised lower and the deficit might disappoint, again. The debt projections under the active scenario is too optimistic; I estimate that the debt path will fall between the active scenario and the business as usual path, which is unsustainable. Consequently, the fiscal consolidation path will prove to be too tight and growth constraining as it stands. Fiscal support needs to be withdrawn gradually than Treasury has pencilled in. failure of which will be a drag on economic growth or even tip the economy into recession immediately after it emerges out of it.         

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