SOUTH AFRICA - OECD

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018218 SOUTH AFRICAE conomic growth is set to strengthen in 2018-19, driven by increased business andconsumer confidence. A favourable outlook in trading partners will benefit consumption will expand, albeit at a slightly lower rate than in 2017 due to taxincreases. Employment trends remain a is projected to remain in the target range, reflecting an assumed stablestrong exchange rate, which lessens the effect of higher international oil prices and thusthe upward pressure from the VAT hike. monetary policy is projected to be moderatelyexpansionary, which is appropriate to support growth. The government budget for2018-19 remains tight, but tax reforms will create some fiscal room for much neededinvestment in higher education and social benefits. Once the fiscal situation improves,government debt reduction needs to be advanced.

2 Network regulation reforms aimed tobroaden competition can further support is improving against a more stable political environmentA change in the political environment marked a positive turning point for businessand consumer confidence. Investment is picking up after three years of decline. Thecurrency has stabilised following an initial period of strengthening after the change ofpower in the ruling party. In addition, the agricultural sector rebounded from the severedrought in 2016, leading to an upward revision of growth in 2017. The budget for 2018/19reversed past fiscal slippage. Rating agencies, acknowledging the favourable politicaldevelopments, have refrained from further downgrades since November economic improvements have not yet translated into higher remains high at 27%, weighing on household consumption. Inequalities inincome and opportunities continue to be high. Young people are especially vulnerable tounemployment, reflecting the low quality of the education system, which contributes toskill shortages and low Africa1.

3 Consumer price index in urban areas, excluding food, non-alcoholic beverages, fuel and :OECD Economic Outlook 103 database; and Statistics SOUTH 2 4 2024620222426283020092011201320152017201 9Y o y % changes % of labour force Gross domestic product, volume Unemployment rate Growth is picking up but unemployment remains high Inflation target 2010 2011 2012 2013 2014 2015 2016 2017 Y o y % changesHeadline inflationCore inflation Inflation has remained within the target range 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018219As fiscal policy tightens, monetary easing should support activityThe budget released in February 2018 proposes several measures to contain the VAT rise from 14% to 15% and the partial freezing of personal income tax brackets willincrease revenues.

4 Increases in social benefit and the introduction of fee-free highereducation for new students will temper the effect of the VAT increase on , budget reallocation towards these measures may outbalance the added revenuesand weigh on the public finances in the fell to around 4% at the beginning of 2018 following a slowdown in priceincreases for food and transport. The VAT increase is likely to have only a small effect oninflation. Inflation is projected to stabilise in the middle of the 3%-6% target range,providing room for some monetary easing to support the economic rebound. In March2018, the Reserve Bank reduced the repurchase rate from to A further reductionin the policy rate is projected to in infrastructure and structural reforms would support growth in themedium to long term. The budget proposes important structural reforms, includingreducing barriers to competition in several network sectors. Timely implementation wouldsustain improved levels of business confidence and increase investment.

5 Higherinvestment will be crucial for growth to translate into lower unemployment and, thereby,greater AFRICA :Demand, output and prices1 2 prices ZAR billionGDP at market prices3 Private consumption2 Government consumption Gross fixed capital formation Final domestic demand3 Stockbuilding1 Total domestic demand3 Exports of goods and services1 Imports of goods and services1 Net exports1- Memorandum itemsGDP deflator Consumer price index Core inflation index2 General government financial balance (% of GDP) Current account balance (% of GDP) 1. Contributions to changes in real GDP, actual amount in the first column. 2. Consumer price index excluding food and energy.

6 Source: OECD Economic Outlook 103 database. Percentage changes, volume (2010 prices) 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC OUTLOOK, VOLUME 2018 ISSUE1 PRELIMINARY VERSION OECD 2018220 Growth is projected to stabilise but remains exposed to internal and external risksGrowth remains fragile and exposed to policy uncertainty and external and the service sector will be main drivers of growth. Despite the favourablepolitical environment, policy uncertainties remain, such as the governance of stateenterprises. In addition, a potential land reform allowing land expropriation withoutcompensation raises uncertainty about property rights, which could lead to a significantdecline in investment. External downside risks relate to an increase in oil prices and toforeign trade tensions, in particular on commodities. In addition, higher interest rates inEurope and the United States could affect the financial market and the exchange ratethrough capital outflows.

7 On the upside, a quick implementation of proposed structuralreforms could reduce remaining policy uncertainties and stimulate domestic demandthrough higher-than-expected investment.