lesetja kganyago : overview of the south african economy address by mr lesetja kganyago, governor of the south african reserve bank, at the 96th annual ordinary general meeting of shareholders, pretoria, 29 july 2016. * 1. * * governor ’ s address the past year has again been a challenging one for the bank against the backdrop of a hesitant recovery in the global economy and a slowing domestic economy. while the recent decision by the uk to leave the european union ( brexit ) has raised the risks to the outlook, the extent of the spillover effects are still unclear. much will depend on the speed and terms of the disengagement. at this stage we do not know which of a number of possible scenarios will unfold. the financial markets have stabilised following the initial volatile response to the decision. however, it is likely that growth in the uk, and to a lesser extent in the eu, will be negatively affected, as a protracted period of uncertainty is expected to undermine both business and consumer confidence. as a consequence, growth forecasts have already been revised down. this comes at a time when the eurozone growth prospects, although still muted, had improved steadily during the past year, partly in response to european central bank monetary stimulus. the us economic recovery appeared to be more sustained during the past year with consistent improvements in the labour market. this was despite a slowdown in the first quarter, which was viewed as temporary. the performance of the economy improved since then, but some negative spillovers from brexit are expected. despite sustained fiscal and monetary stimulus in japan, economic growth was marginally positive. while the past year was slightly more favourable for advanced economies, the same cannot be said for emerging markets, although there were divergent experiences. the growth slowdown in china continued, accompanied by increased volatility in domestic financial markets. this was partly in response to policy changes and persistent concerns regarding the stability of the financial sector. the slower growth continued to impact negatively on commodity prices, further complicating the outlook for commodity - producing emerging markets. more recently, the economy appears to have responded to renewed stimulus measures, and risks of a hard landing have abated. this has also helped to stabilise commodity prices. both brazil and russia slid into recession during this period and continue to contract. by contrast, india experienced high growth following a number of structural reforms. the slowdown in sub - saharan africa, in response

of volatility. since the time of the previous agm the rand depreciated on a trade - weighted basis by about 8, 5 per cent. however, it traded in a wide range of between r12, 70 and r16, 90 against the us dollar. this volatility was not only externally generated : domestic developments, including the fallout from the political events in december last year ; the risks of a sovereign ratings downgrade ; the wide current account deficit and the declining growth were important contributors to these trends. whereas a downgrade was avoided in june, similar concerns are likely to re - emerge later in the year when the next reviews are scheduled. the domestic economy was characterised by a persistent slowdown during the past year, driven by weak consumption and investment expenditure growth. the agricultural sector was particularly hard hit by the worsening drought. the economy grew by 1, 3 per cent in 2015, and the outlook for the economy remains constrained, particularly following the contraction of 1, 2 per cent experienced in the first quarter of this year. nevertheless we expect that to have been the low point of the current growth cycle. the bank forecasts economic growth of zero per cent in 2016, rising to 1, 1 per cent, and 1, 5 per cent in the coming two years. these growth rates are insufficient to make significant inroads into the deteriorating unemployment numbers. the direct effect of the brexit decision on domestic growth is expected to be marginal in the short term, while the longer term impacts will depend on the outcome of the negotiations and the impact on global growth generally. inflation averaged 4, 6 per cent in 2015, and was within the target range in each month of the year, reaching a low point of 3, 9 per cent in february. a large part of this favourable trend was driven by a temporary respite from lower international oil prices. since january 2016, however, inflation has breached the upper end of the target range, and is expected to remain above target until the third quarter of next year. in the absence of domestic demand pressures, these adverse inflation trends have been driven primarily by supply side factors. these include the exchange rate, drought - induced food price increases, and a reversal of the favourable oil price shock. in response to these inflation pressures, the monetary policy committee continued with its moderate tightening cycle that began in january 2014. since july 2015 the repo rate increased by a cumulative 125 basis point, to 7, 0 per cent in march