Economic overview: Recent developments in the global and South African economies – August 2017
With the domestic drivers of growth currently under strain, the South African economy will most likely have to rely on exports for a positive performance.
Consumer and business confidence are at very low levels, thus providing little hope for a meaningful recovery in household consumption spending and a turnaround in fixed investment activity. Government expenditure, in turn, cannot come to the rescue due to fiscal constraints and consolidation commitments. In contrast, demand conditions are improving in global markets. Alongside a relatively competitive currency at the present time, this should provide significant opportunities for export development.
The geographical reach and sectoral spread of South Africa’s merchandise export basket have improved over time, but high degrees of concentration prevail. Export trade has been shifting towards emerging market economies such as China and India, with the advanced economies’ combined share of the overall export basket having declined. The rest of Africa has become one of the largest markets for South Africa’s merchandise exports, accounting for 27.8% of the overall export basket in 2016, up from a 25.4% share in 2010. The extent of South Africa’s trade concentration is higher at the sectoral level, but has also been improving. The manufacturing sector accounted for 60% of the merchandise export basket in 2016, compared to 57.1% in 2010.
Exports play an important role in terms of economic activity and employment creation. An estimated 1.23 million jobs in the South African economy, or more than 10% of total employment, are directly related to exports. The figure jumps to 2.53 million, or 21.4% of overall employment, if indirect exports (i.e. through linkages of export producers with input suppliers across the economy) are also taken into account.
South Africa should take advantage of improving conditions in global markets and the expected rebound in world trade. This is especially important in the current economic environment, which is characterised by weak local demand and low confidence levels amongst domestic consumers and businesses. Exports may thus safeguard important segments of South Africa’s production base and employment, as well as making indispensable contributions to overall economic growth and job creation, particularly during this difficult phase for the economy.
Exports are likely to be the key driver of South Africa’s economic growth in the shorter term
The South African economy is struggling to exit from the technical recession entered into in the 1st quarter of 2017.
The production side of the economy continues to reel from difficult trading conditions, particularly in the domestic market. Confidence, which fuels and sustains economic growth, is currently at very low levels amongst consumers as well as businesses, thus providing little hope for a meaningful turnaround in spending activity in the shorter term. In contrast, improving conditions in global markets and relatively competitive exchange rates of the rand support expectations of exports being the likely driver of growth in South Africa’s gross domestic product (GDP) in 2017 and 2018.
Prospects for the South African economy over the next three years remain largely unsatisfactory. Weak growth of just 0.6% is forecast for 2017, with only a modest up-tick in 2018. A somewhat faster growth momentum is anticipated in 2019, taking the projected average growth in real GDP growth over the period 2017-19 to only 1.3% per annum.
Uncertainty in the political environment, weak demand and subdued economic growth domestically, alongside the risk of further sovereign credit rating downgrades, are likely to continue to weigh heavily on business and investor confidence in the shorter term. Moreover, spare production capacity in many sectors of the economy does not yet warrant investment in additional production capacity, with capital expenditure instead channelled towards maintenance of equipment, technology upgrades and/or the pursuit of specific market opportunities. The declining trend in private sector fixed investment may continue in 2017, with its growth potentially moving to marginally positive territory in 2018.
In light of the weak demand conditions domestically, the main contributions to growth in 2017 and 2018 are likely to emanate from the export sector. South Africa’s balance of trade recorded a surplus of R15.7 billion in the 2nd quarter of 2017, one of the largest on record.
Growth in Sub-Saharan Africa is likely to remain relatively subdued in 2017 at an estimated 2.7% (up from 1.3% in 2016), as the region’s largest economies struggle to gather economic momentum. However, improving conditions on the global front, together with expectations of positive developments in commodity markets should provide an impetus to growth from 2018, with the region contributing positively to overall world growth, albeit marginally.
Increasing demand in global markets and relatively competitive exchange rates of the rand should provide export development opportunities for South African businesses. Considering the currently subdued levels of demand in the domestic market, this is particularly important. Some of these opportunities will be in the form of expanding sales of products already being sold in traditional export markets, or identifying new trading partners. In other instances, it may involve penetrating global markets for the first time.
Moreover, the broader-based recovery in industrial/manufacturing production in major industrialised economies, among others, together with increased infrastructure development and upgrading in various parts of the world are expected to provide significant impetus to the demand for commodities over the medium-term. This should not only benefit South Africa’s own export trade performance, but also augurs well for the economic performance of resource-intensive Sub-Saharan African economies, which in turn should unlock further regional trade opportunities for South African businesses.
Significant shifts in the global reach of South Africa’s export sector
The global reach of South Africa’s export sector has changed in recent years. Utilising a normalised Herfindahl-Hirschman Index, the geographic concentration index associated with South Africa’s exports improved from 21.8 in 2010 to 20.3 in 2016. Furthermore, there has been a shift towards emerging market economies such as China and India over this period, with the advanced economies’ combined share of the overall export basket declining from 40% to 38.3% over the period.
At the regional level, the rest of Africa has become one of the largest markets for South Africa’s merchandise exports, having accounted for 27.8% of the entire export basket in 2016, up from a 25.4% share in 2010. Exports to other African markets totalled R300 billion last year. The European Union as a group (especially the German, British and Dutch markets) remains an important regional destination for South Africa’s exports, accounting for 22.6% of the total in 2016. However, China has become the single largest export market at the individual country level, although its 9.3% share of the entire merchandise export basket in 2016 was considerably lower than the 12.9% high recorded in 2013.
The European Union as an external market has contributed positively to the overall growth (in real terms) in South Africa’s merchandise exports from 2014 to the 1st semester of 2017. In contrast, the drop in exports to the United States and some members of the Southern African Customs Union (SACU) in 2016 as well as in the 1st half of the current year implied negative contributions, or detractions from overall export growth.