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JOHANNESBURG (Capital Markets in Africa) – The South African macroeconomic landscape is expected to gradually improve this year following the weak growth performance recorded last year. In essence, growth should lift, inflation should fall and policy rates should remain stable. This view is underpinned by several developments.
Importantly we expect global growth to continue to rise gradually in the period ahead as the recent increase in commodity prices boost growth in commodity-exporting EMs, improved household (and corporate fixed investment) spending, buoyed by Trump inspired tax cuts, drive growth in the US higher, and on-going policy stimulus keeps the Chinese economy relatively vibrant. A consequence of higher global growth, steadily rising inflation and more fiscal stimulus is that the Fed will continue its process of measured policy normalisation. All these developments suggest that risk-free bond yields should continue to climb, but not rise aggressively further. Moderately faster global growth should be supportive of South African exporters.
The mere absence of negative shocks will also prove beneficial to the domestic economy. The negative impact of the severe drought on agricultural output (directly) and food price inflation (indirectly) is fading, the terms of trade (rand export prices relative to import prices) have improved (giving miners a much-needed earnings boost), and severe electricity outages appear increasingly unlikely over our forecast horizon.
Additionally falling food price inflation, a relatively stable rand and excess production capacity will see inflation fall this year. In turn, this should not only prevent policy rates from rising further, but it should also provide a boost to real disposable income growth, and so consumer spending.
These are all favourable developments supportive of a growth recovery this year. Still, the degree of the prospective domestic upswing will be constrained. Estimated potential growth rates have fallen across the globe (including in the US, Europe, and China – all key trading partners of SA. This will limit the extent to which the global recovery look set to propel the economy upwards. Additionally, the country still suffers from major supply-side constraints which will restrain the strength of any potential upswing locally: labour productivity continues to ease, the poor financial health of most SOEs means much-needed infrastructure investment is slow to evolve (or doesn’t happen at all), the cost of doing business in SA remains too high while uncertainty around government policy continues to dent business sentiment (and thus the private sector’s willingness to aggressively raise fixed investment). We doubt much of these constraints will be lifted in the current political environment. We, therefore, anticipate potential growth to remain limited to a 1.5% – 2% range, which will also result in further sovereign rating downgrades.
The risks to our cautiously optimistic outlook remain meaningful. Global concerns include: (1) a faster acceleration in inflation in the US that forces the Fed to hike interest rates more aggressively than currently assumed. This will weigh on the rand, domestic inflation, and growth; (2) rising anti-globalization sentiment which, if manifested in policy action, could usher in a period of global stagflation and; (3) a deflationary shock triggered by debt default in a systemically important country or sector. In this regard it’s worth remembering global indebtedness, already at unprecedented levels, continues to increase at a rapid rate. We remain particularly concerned about China’s debt dynamics.
On the domestic front, political developments pose the biggest risk to our outlook. The ANC will choose its new leadership on 16 – 20 December. No doubt the run-up to the elective conference will be characterised by significant political and policy noise which, in turn, stand to hamper much needed economic reform efforts. In a bad scenario, policy mistakes might even be made of certain factions in the ruling party try to secure support in the run-up to the conference. Efforts from certain parts of the political spectrum to secure patronage networks and access to state resources pose further risks. Importantly, these political event risks are all evolving against the backdrop of growing socio-economic pressures that could easily reach boiling point and so force policy makers to implement ill-advised policies with negative repercussions for financial markets and the broader economy.
This article features in the February 2017 edition of INTO AFRICA Magazine, insights on Africa’s economic prospects for 2017.
Sizwe Nxedlana is Chief Economist at First National Bank. Prior to that, he was a Senior Economist in FNB’s Wealth segment where he was involved in macroeconomic and investment research and is a member of the investment and asset allocation committees. Before joining FNB Wealth he was an economist at FNB Commercial. He began his career at the Bureau for Economic Research in Stellenbosch followed by a stint at Kagiso Trust Investments. He completed a Bachelor of Commerce degree majoring in Philosophy, Politics, and Economics from the University of Cape Town and a Master of Commerce degree in economics from the University of KwaZulu Natal.