By Patrick McGroarty
JOHANNESBURG-The World Bank lowered its growth forecast for South Africa, saying the continent's largest economy faces serious economic headwinds as Europe's debt crisis persists and China's growth slows.
South Africa will likely grow 2.5% this year, the bank forecast in an update on the country's economy on Tuesday, less than the 2.7% expansion it had predicted in January.
South Africa's reserve bank had said last week that the economy would grow 2.7% this year, but warned that the forecast could be cut if growth slows globally.
The World Bank said a full-blown euro-zone crisis could cut 2.2 percentage points off South Africa's growth this year.
A steep fall in commodity prices also would leave South Africa's mining-backed economy particularly vulnerable, the World Bank said, potentially shaving as much as 1.7 percentage points off growth this year.
"Of developing countries, South Africa would be among the 10 countries to be hit most by the drop in commodity prices," the bank said.
An inadequate power grid, already operating near capacity, also threatens efforts to boost growth, the bank said.
In a detailed assessment of South Africa's steep income inequality and dysfunctional labor market, the bank wrote that the country's growth has been too low to make up for the huge disparity in education and health services between rich and poor South Africans.
"While GDP growth…has averaged a credible 3.2% a year since 1995…it has proven insufficient to absorb the wave of new entrants to the labor market," since the end of white-minority rule in 1994, the report said.
South Africa's official unemployment rate hasn't fallen below 20% since then, and currently stands at 25.2%.
To make up for the lack of opportunities for South Africa's poorest residents, the government has instituted a sweeping social-welfare program that provides 70% of the income for the poorest 20% of South Africans.
Without that aid, the poorest 40% of South Africa's 50 million people would have lower incomes today than in 1995, the report said.
"To reduce [inequality] to more reasonable levels over the long run, social assistance is clearly not enough and needs to be complemented by other initiatives," the bank wrote. "These would include a special focus on human capital development, particularly among children and youths."
South Africa's reserve bank acknowledged some of these same challenges last week when it cut its key interest rate a half percentage point, to 5%, the first move in nearly two years.
Reserve Bank Gov. Gill Marcus said when she announced the cut that the bank had decided it was necessary to be proactive in the face of global turmoil and domestic weakness, but warned that it would take coordinated effort by South Africa's government and business leaders to boost growth and employment.
Write to Patrick McGroarty at patrick.mcgroarty@dowjones.com ...
