SA’s economy: what could go right?
By Claire Bisseker - Nov 14th 2018, 08:46
After the reality check provided by the medium-term budget as to the sorry state of the country’s public finances, and with rising jitters about global growth, it is hard to be optimistic about the prospects for SA’s economic recovery.
Indeed, some warn that world growth may be heading for a sharp slowdown over the next few years. But one economist has raised the counterintuitive possibility that a number of things could finally go right for SA.
Coronation economist Marie Antelme thinks the SA consumer could have a bit more breathing space in the months ahead and that SA’s real growth rate could double in 2019.
She says that the economic malaise the SA consumer has suffered over the past 10 years has resulted in deleveraging so that few visible excesses now exist. Credit growth in real terms is low but stable, debt-service costs remain low and household saving has turned positive.
All this suggests that consumers have rebuilt a small cushion, she notes in the latest issue of Coronation’s quarterly publication, Corospondent. In addition, consumer confidence remains elevated, which is historically consistent with stronger spending.
Despite the weaker currency and acceleration in oil prices, Coronation also expects headline consumer inflation to stay in the 3%-6% target band over the next few years.
While higher fuel prices are a rising headwind, the pace of increase should slow in early 2019 and food inflation should remain reasonably low, she says.
Though there is a risk that the Reserve Bank will increase interest rates as inflation ticks up, Coronation considers it unlikely that SA will experience an aggressive hiking cycle.
Importantly, there is unlikely to be another significant increase in the household tax burden in 2019/2020 following the National Treasury’s recent undertaking that the major taxes will not be hiked next year.
Antelme also notes that the outlook for employment is stable, and it is possible that the government’s new infrastructure plan and the extension of the youth wage subsidy could help create some jobs.
When it comes to investment, Antelme says that while gross fixed capital formation was very weak in the first half of 2018, private capital expenditure was, in fact, positive. Companies have increased their investment in nonresidential structures and transport equipment, and recent data shows the number of building plans passed has visibly picked up, she says.
And inventories, run down heavily in response to interrupted mining and manufacturing supply, have room to recover.
While Antelme concedes that the rand may remain vulnerable, she believes some offset is possible.
For instance, the sharp rand depreciation coupled with moves to simplify visa requirements could presage a bumper tourism season in the year ahead.
Turning to politics, the country is holding its breath for the outcome of the 2019 elections. The consensus view is that the ANC will win a decent enough majority, allowing President Cyril Ramaphosa to consolidate his power by appointing a cabinet of his choosing.
With better, more accountable leadership in the cabinet, improved state delivery and more growth-supportive policies should follow, raising the economy’s competitiveness.
The reforms identified by the government include modernising the energy, water, transport and telecommunications industries; lowering barriers to entry through increased competition and small-business growth; promoting export competitiveness; harnessing regional growth opportunities; and reducing the costs of doing business.
The Treasury’s modelling suggests that such reforms could raise GDP growth by three percentage points over the next decade.
Kenny Fihla, head of corporate and investment banking at Standard Bank, believes the government has already made solid progress in cleaning up governance, repairing relations with organised business and labour, and improving the investment climate.
Though several "policy and administrative hangovers remain, including the poor financial position of some state-owned enterprises (SOEs), the economy is on a positive trajectory, he said at the SA Tomorrow Investor Conference in New York last week.
"I’m prepared to stick my neck out and say that growth will accelerate by about a percentage point by the end of next year," said Fihla. "The effects of better governance and more efficient public spending could well add another percentage point by the end of 2020."
Discovery CEO Adrian Gore also thinks SA has made considerable progress. He is equally convinced that the economy is poised for growth. Discovery has committed to spend most of the R13bn it will invest in its operations over the next five years at home.
Coronation expects the economy to recover moderately in the third quarter and accelerate further into 2019. It is forecasting real GDP growth of 0.8% this year, accelerating to 1.8% next year, ahead of the Treasury’s forecasts of 0.7% and 1.7%. The October Reuters consensus expectation is 0.8% in 2018, 1.6% in 2019 and 2.2% in 2020.
However, this still implies a relatively constrained acceleration or, as Antelme puts it, "a return to an uninspiring past".
The Treasury has revealed a more bullish scenario (Scenario C on the graph) in which real GDP growth averages one percentage point higher than its baseline forecast — rising to about 2.7% in 2019 and 3.1% in 2020.
But this, it acknowledges, will require policy certainty, a significant improvement in domestic confidence, and ongoing reforms that reduce SA’s logistics costs and the fiscal risk posed by SOEs. It also assumes that the rand will strengthen and bond yields fall as foreign capital inflows increase in response to a healthier economic outlook and a declining sovereign-risk premium.
If, however, the opposite occurs — confidence and economic activity are slow to recover; risk aversion and SA’s borrowing costs rise; international trade tensions increase; and monetary policy tightens in developed economies, causing global GDP to slow — the SA economy could remain sluggish.
This dismal outlook is captured by Scenario A on the graph. In it, SA grows by just 0.9% in 2019 compared with 1.7% in the Treasury’s baseline forecast.
Which future SA will experience depends partly on the global economy.
In Scenario B, global growth is one percentage point lower than forecast and global financial conditions are significantly tighter, prompting a developing-country debt and currency crisis that pushes SA into a recession in 2019 and 2020.
Though global growth is still relatively robust, it’s becoming patchy and the risks of a slowdown are rising.
The biggest risk is faster-than-expected hiking by the US Federal Reserve in response to a continuation of robust US growth. Given that growth is slowing in several other developed countries, the dollar could remain strong, which reduces the attractiveness of riskier assets and makes life uncomfortable for emerging markets.
A further escalation in trade tensions is also of concern, with the markets fearing an increase of US President Donald Trump’s 10% tariff on Chinese imports to 25% by January 1. Citibank estimates this extra tariff could drag China’s growth down by another 50 basis points (bps) and knock 0.2 percentage points off global growth.
What it means
GDP growth could double if SA gets a few things right
Though China has introduced several modest measures to boost the economy, a slew of disappointing economic data suggests that pressure on its economy is mounting. Significant further stimulus measures will be required to halt the economy’s slowdown and prevent negative global spillovers.
Capital Economics group chief economist Neil Shearing believes the global economy will undergo "a reasonably sharp slowdown" over the next couple of years, led by the US and China.
He says that in the US, real interest rates have already risen by two percentage points since 2015, with three more 25bps increases considered likely in this cycle. There have been four occasions since the mid-1980s when real interest rates in the US rose by more than two percentage points, and three of these ended in recession, he warns.
With the effects of this year’s tax cuts also likely to fade, he expects US growth to slow sharply in 2019.
Policy tightening is also partly behind the slowdown in China. The official Chinese data is opaque, but Capital Economics estimates that China’s growth has slowed from about 6% to 5% over the past year. It expects it to drop to 4% by the middle of next year due to a lack of market-centred structural reforms, and for long-term trend growth to fall to just 2% over the coming decade.
The threat of higher-than-expected US rates, a stronger dollar for longer, rising trade tensions and a weaker China will create a challenging external environment for SA.
This leaves very little room for error by SA’s policymakers. But if they could just a get a few things right, and sustain that reform momentum, the economy should reward them with far better growth.
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