The outlook for 2016 and 2017 is uncertain and economic activity will likely remain subdued. Expected increases in electricity supply from investments in generating capacity should raise supply only by 2017, easing constraints that have hindered production and increasing investor confidence. Also, strengthening growth in major trade partners, such as Europe and the United States, should reinforce export growth. Inflation is hovering around the upper end of the target band, driven by the depreciation of the rand and higher electricity and food prices.
Fiscal policy has turned restrictive, constrained by a spending ceiling and the need to stabilise public debt. The combination of higher inflation and deteriorating economic activity is a dilemma for monetary policy, and any further tightening should be cautious. Structural reforms – including improving the business climate and removing bottlenecks, and liberalising energy and transport markets – are needed more than ever to boost output, jobs and living standards for the whole population, and hence to make growth more inclusive.
South Africa is heavily dependent on coal, and is a very energy and carbonintensive economy. The government is committed to reducing greenhouse emissions by 42% relative to a no-change scenario by 2025. Renewable energy and the development of a nuclear power plant are part of the strategy toward a low-carbon economy. However, coal-fired power stations remain important. The planned carbon tax should be implemented and subsidies to fossil fuel consumption reduced. Incentives to increase energy efficiency should be strengthened further.