lesetja kganyago : south africa ’ s growth performance and monetary policy address by mr lesetja kganyago, governor of the south african reserve bank, at the bureau for economic research, cape town, 22 october 2015. * * * introduction thank you for inviting me to address you today. south africa ’ s growth rate has been declining persistently since the post - crisis rebound of 2011. the bank ’ s 2015 forecast has gdp growth at 1, 5 per cent, the lowest level since 2009. we expect next year to be only slightly better, at 1, 6 per cent. these narrowly positive growth numbers are disappointing, not least because they fall well below the 5, 4 per cent growth described in the national development plan as the rate necessary for meaningful progress against unemployment and poverty. i would like to talk to you today about this low growth problem – and about the role of monetary policy. boom and bust, recovery and relapse it is perhaps worth reminding ourselves how we arrived at the present circumstances. the current post - crisis era of low growth was preceded by a large boom. the south african economy expanded continuously from the end of 1998 to the middle of 2008, its output increasing by almost half. real gdp, on a per capita basis, grew from r44 000 to r54 000. 1 this partly reflected marked structural improvements in the country : a much better fiscal situation, a switch to inflation targeting, and south africa opening to world trade and financial flows. but, in the mid - to late - 2000s, these structural improvements coincided with powerful cyclical forces. soaring terms of trade and robust borrowing sent growth levels to well above potential, understood as the rate of expansion which does not accelerate inflation. the economy overheated as prices for labour and capital resources were bid up and export prices increased continuously. moreover, sustained growth in house prices revealed an asset price bubble which had developed in response to low credit costs. the domestic economy was on an unsustainable trajectory. rising global food and oil prices – pushed upward as part of the commodity price bubble – added to domestic inflation and prompted greater efforts to slow the pace of fiscal spending growth and a tightening monetary policy stance. 2 this acted on credit extension and started to slow lending. it was in these slowing conditions that the great recession hit in 2008, following the bankruptcy of the lehman brothers. this was an exogenous shock ; it was not obvious that it had much to do with south africa, but it

shanghai stock exchange bubble. the second was a devaluation of the renminbi. exactly what these events mean for china ’ s growth trajectory remains unclear. the imf ’ s forecasts have not changed from the april to the october edition of the world economic outlook : 6, 8 per cent for 2015 and 6, 3 per cent for 2016. bloomberg consensus forecasts have finally edged down, in the third quarter of the year, with the median for 2015 now at 6, 8 per cent and for 2016 now at 6, 5 per cent. that median, however, was constant throughout the period of market turmoil, suggesting that markets remain unsure of the gdp data. it is often argued that forecasts for china ’ s economic growth remain anchored at too high a level. the debate is very active. it is even possible that the data are understating growth by undercounting the services sector and overemphasising the industrial sector, which is plagued by overcapacity. all we really know is that uncertainty over china ’ s prospects spiked in the second half of this year. along with falling commodity prices, this has fuelled speculation about a possible third chapter to the world economic crisis, with emerging markets taking their turn after the us and the uk, in 2009, and the euro area, in 2011. these events also affect the advanced economies. the us federal reserve declined to raise the fed funds rate recently, despite repeated signals that this course of action was likely. two fed governors have since publicly suggested that rates will not rise at all in 2015, household debt to disposable income remains relatively high, at around 78 per cent. since mid - 2010, private sector investment has averaged 3, 1 per cent – a full 6 percentage points lower than its 2001 – 2008 average. bis central bankers ’ speeches although rising rates remains the baseline expectation. 9 headline cpi inflation was once again negative in the us in september, although this was once again seen to be temporary. the deflation risk is higher in the euro area, which has faced more outright deflation than the us and continues to have more risks weighted in that direction. sinking inflation forecasts have prompted a renewed discussion of the possibility of expanding frankfurt ’ s programme of asset purchases. the fact that the fed cannot raise rates yet is a sign of global weakness and the european central bank must do even more quantitative easing. domestic news have also been discouraging. the fnb / ber consumer confidence index