The first chapter of the ninth editionof the economic update discusses recent economic developmentin South Africa. It underlines that economic growthcontinued to decelerate in 2016, marking the thirdconsecutive year of negative per capita growth. Nonetheless,2016 may mark the trough of South Africa’s business cycle. Amodest recovery is now foreseen for 2017 and 2018, drivenmodestly by rising commodity prices, easing inflationarypressures and a pickup in credit stimulating householdconsumption demand. By contrast, the continuation of theneeded fiscal consolidation efforts should not offer anysignificant stimulus to GDP growth. The report argues thatprivate investment will be the determining factorinfluencing the GDP trajectory. On the one hand, continuedweak private investment would further undermine growthprospects, raise again the likelihood of a costly ratingdowngrade, and perpetuate a vicious circle of low growth–lowinvestment. On the other hand, accelerated investment couldbenefit from a still weak and more stable rand, improvingelectricity capacity, and less fractious labor relations, toboost exports and growth and stabilize the capital account.Accelerating investment will require providing a predictablebusiness environment, not least through greater policycertainty. The second chapter discusses the relationshipbetween private investment and jobs creation. It revealsthat in recent years, private investment increasingly wentto less productive sectors, generating negative total factorproductivity growth. It analyses using firm level data theeffectiveness and efficiency of investment tax incentivesand suggests that, overall, tax incentives generated since2006 additional private investment exceeding foregone fiscalrevenue, and contained the contraction recorded in somesectors, manufacturing in particular. It nonetheless makesthe case for re-orienting these incentives towards sectorswhere their effectiveness can be observed (agriculture,manufacturing, trade, construction, and other services) andaway from sectors on which they have no tangible impact(mining, finance, transport, and electricity). Sectors whichwould benefit from re-oriented incentives are also thoseenjoying the largest employment multipliers, thus amplifyingthe impact of incentives on jobs creation. The impact ofthese incentives would equally be magnified by the emergenceof new comparative advantages in manufacturing and trade,resulting from the decline in commodity prices and theprotracted depreciation of the Rand since 2012.
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