Anton Ferreira and Brendan Boyle

Anton Ferreira and Brendan Boyle

Finance Minister Trevor Manuel cut his forecast for economic growth yesterday, and warned South Africans that even this was a best case scenario that could be torpedoed by the global financial meltdown.

Presenting his medium-term budget framework in parliament, Manuel said the 4,2 percent growth in gross domestic product next year that he estimated in February was now more likely to be 3,0 percent, but that it should pick up to 4,0 percent in 2010.

Manuel said the government would continue to spend on essential infrastructure and social projects - including education and health - though it meant a small budget deficit for "the next few years".

He announced a R171 billion increase in the spending budgeted last February over the next three years, partly to compensate for inflation. The figure includes assistance to Eskom.

"The present banking and credit crisis will have far-reaching repercussions that will play havoc with long-term economic forecasts for all countries," Manuel said. "How the crisis is managed will affect the trajectory of the South African economy."

He sketched two scenarios - a deep recession in the developed world that would hit economic growth in emerging markets like SA, or a "more hopeful" scenario in which greater international policy coordination and improved regulatory capacity resulted, eventually, in more balanced growth.

The first scenario would mean "a prolonged period of much slower growth" for SA, Manuel said. "Our current economic forecast reflects the more benign set of assumptions."

The minister said the "unforgiving global economic climate" highlighted the need for SA to address its main challenges - unemployment and poverty - in a more concerted way.

"South Africa requires consistently stronger growth in productivity... innovation and competition are essential, along with investments in human capital, plant and equipment, and infrastructure."

Manuel said a new way of measuring inflation would be introduced in January and said the cost of living index would drop below six percent - from around 13 percent - by the third quarter of next year.

This is more optimistic than the view of the Reserve Bank, which said a drop to below six percent was only likely in 2010.