Economic overview: Recent developments in the global and South African economies – November 2017
Although conditions have recently improved to varying degrees in a number of sectors of the South African economy, such as agriculture, mining, manufacturing and retail trade, the economic environment remains generally weak.
South Africa’s economic outlook
Growth prospects are likely to remain unsatisfactory in the short-term, with some acceleration in the expansion momentum expected over the medium- to longer-term.
The rate of increase in South Africa’s gross domestic product (GDP) is projected by the IDC at only 0.6% for 2017, potentially rising to a very modest 1.2% in 2018. GDP growth is projected at 2.3% per year, on average, for the period 2018 to 2022, which would be well below the National Development Plan’s average annual growth target of 5.4% per annum over the period up to 2030.
Benefitting from surpluses on the balance of trade since February 2017, the deficit on the current account of the balance of payments narrowed during the course of the year. The cumulative trade surplus for the first 9 months of 2017 amounted to R47.1 billion, compared to a deficit of R6.7 billion over the same period a year earlier.
Weak economic conditions at home resulted in imports declining by 1.2%, with machinery and equipment imports falling by 6%. Higher agricultural production due to improved climatic conditions in most of the country permitted a 29% drop in imports of agriculture products. On the other hand, the value of imports of refined petroleum product imports increased by 47%.
South Africa’s export performance has benefited from steadily improving demand conditions in external markets. A relatively competitive ZAR exchange rate and some recovery in commodity prices also supported overall exports, which increased by 5.4% (year-on-year) over the first 3 quarters of 2017. Whereas mining exports rose by 15%, external sales of motor vehicles declined by 8.6% despite the improving economic climate globally, including Europe.
Increasing optimism amongst global business and consumers are supporting higher levels of economic activity in advanced economies as well as in emerging markets. This underpins the International Monetary Fund’s projections of 3.6% and 3.7% growth in world GDP for 2017 and 2018, respectively. This is a significant improvement on the 3.2% expansion recorded in 2016.
This momentum is being assisted by accommodative monetary policy made possible by relatively muted inflationary pressures, especially but not exclusively in advanced economies. Although the normalisation of monetary policy is now under way in the United States (US), the pace of increase in policy rates going forward is expected to be quite gradual. Market expectations are positioned in favour of another 25 basis points’ increase in the Federal Funds rate in December 2017, but this should not destabilise global financial markets.
Since the tax cuts sougth by the Trump administration have yet to materialise, the associated stimulus has not been forthcoming. Nonetheless, the US economy is still expected to record growth of 2.2% and 2.3% in 2017 and 2018, respectively. This has positive implications for global trade dynamics and for South Africa’s export performance, for the US accounts for around 13% of global import volumes and 7.3% of South Africa’s exports.
The IMF is projecting output growth in the Eurozone at 2.1% for 2017, or 0.4 of a percentage point higher than its previous estimates. This is underpinned by lower political risks and improving aggregate demand, which is also being supported by accommodative monetary policy. The European Union (EU) accounts for 34% of global import volumes and 22.6% of South Africa’s export basket. However, the medium-term prognosis for the EU’s economy continues to be weighed downward, to some extent, by the potentially negative implications of Brexit as well as the public and private debt overhang in its peripheral member states.
Economic growth in China has been supported by sustained domestic policy stimulus and robust public investment, which has been significantly propelled by the rapid accumulation of municipal debt. Despite the debt sustainability risks and the Chinese authorities’ deleveraging efforts, economic growth is projected to come in at 6.8% for 2017, moderating to 6.5% next year. While restrictions on industrial production related to pollution control measures are expected to weigh on demand for commodities, the net effect of China’s robust economic expansion is still expected to favour South Africa’s trade performance.
The prognosis for growth in import demand in the world’s major markets, including the United States, Eurozone and China, is thus increasingly favourable. The rate of increase in import demand by advanced economies is projected by the IMF to accelerate from 2.7% in 2016 to an average of 3.9% over the period 2017 to 2020. Import growth in emerging markets, in turn, is forecast to rise from 2% last year to an average of 4.8% over 2017-2020. This provides a strong basis for sustained growth in global demand for South African primary commodities and manufactured exports going forward.
Improving economic sentiment globally and a still robust growth outlook for China in particular, which accounts for 50% of world demand for commodities, are expected to support global demand and the prices of industrial commodities. This should have positive implications for South Africa’s terms of trade over the short- to medium-term.
Continuing challenges in some of Sub-Saharan Africa’s economies, including several macroeconomic imbalances, as well as political and policy uncertainty, continue to hamper the region’s growth, which is expected to register 2.6% in 2017. Nevertheless, the region’s economic performance is expected to gather momentum in the years ahead. This will be on the back of more supportive domestic as well as external conditions, including increased foreign demand for and prices of key export commodities. The IMF expects the region to post 3.5% average annual growth over the period 2018 to 2020, which is well below the average of 5.6% achieved over the 15-year period to 2015. African economies accounted for 27.8% of South Africa’s exports last year.
Against this background of improving conditions in global (and regional) markets, numerous South African business enterprises are likely to focus increasingly on growing export sales, especially in light of yet subdued demand domestically.
Macroeconomic performance under more adverse conditions
The downside risks to South Africa’s economic outlook are high. It is therefore important to assess the potential repercussions of a worse performance. Accordingly, to supplement IDC’s baseline growth projections (Base Case), as outlined in previous sections of this report, an alternative scenario (Low Road) has been modelled on the basis of a set of assumptions.
In such a scenario, the assumptions regarding global growth were lowered to some extent; South Africa’s sovereign credit ratings were assumed to be downgraded to sub-investment levels across the board (including ratings for local currency denominated debt); confidence levels in the economy were assumed to decline further and to remain very low for an extended period of time, leading to a substantial further deterioration of domestic demand and investment conditions; and, due to the exclusion of South African bonds from major global indices, the ensuing large net capital outflows were assumed to lead to a sharp weakening of the ZAR, with adverse implications for inflation and interest rates.
Sectoral performances in a Low Road scenario
A deterioration of the domestic economic environment would reflect increasing strain in the various drivers of demand in one way or another, impacting on sectoral performances. However, in the Low Road scenario described above, all sectors of economic activity, without exception, would be expected to be affected adversely, albeit to differing degrees.
For example, reduced household spending on durable goods would have a negative impact on the local motor vehicles sector, mainly passenger cars, whilst lower investment expenditure would affect the demand for commercial vehicles, both medium and heavy. In addition, weaker global demand would affect the sector’s export performance. Reduced overall demand for motor vehicles would, in turn, have negative consequences for capital spending and employment levels in the sector itself.
Many supplying and supporting industries whose activities are closely linked to the motor vehicle sector would also be affected by lower production in this sector. For instance, demand for inputs such as fabricated metals, rubber, textiles, leather, electronics, glass, paint etc. would tend to fall. Hence, production in the respective supplying industries would have to be adjusted downward in line with weakening demand from the motor vehicle sector.
In a Low Road scenario, many firms across several sectors would face serious financial difficulties, which could compromise their sustainability and employment. Substantial job losses would possibly be recorded in labour-intensive sectors such as agriculture, forestry and fishing; textiles, clothing, leather and footwear, as well as in construction. Consequently, efforts to address the triple challenges of unemployment, poverty and inequality would suffer major setbacks in such a scenario.