It has become my tradition to begin each year with a peek into our economic crystal ball, to assess the prospects for the global economy and, more specifically, for South Africa and its major trading partners. However, economic activity does not occur in a vacuum; geopolitical factors as ever provide the backdrop to all aspects of our lives.
In early 2017 it is hard to avoid the feeling that, during the year ahead, the backdrop may all too readily push its way to the forefront of affairs. The biggest threat to a still-fragile world economy may yet be human folly, driven by greed, fear, and the general lack of wisdom and statesmanship displayed by so many of our global leaders. South Africa’s prospects for 2017 are threatened by the same factors.
We will touch on these threats as we go along. Turning our attention to the global economic landscape, most experts believe that economic activity is likely to improve in 2017 and 2018, after a rather pedestrian showing in 2016. Emerging markets and developing economies appear to have the best growth prospects, although for Sub-Saharan Africa and South Africa, specifically, this will be off the back of a poor performance last year.
The world economy grew by 3.1% in 2016, and is expected to nudge up to 3.4% in 2017 and 3.6% in the following year. South Africa grew by between 0.2% and 0.3% in 2016, with the growth range for this year expected to be between 0.8% and 1.2%, and between 1.6% and 2.1% for 2018.
This should be seen against South Africa’s population growth of 6.4% between 2011 and 2015 (an average of 1.6% per year), an expansion rate that is anticipated to accelerate in the future. As such, growth in economic output will be hard pressed to match population growth, a reality evidenced by GDP per head of population between 2011 and 2015. Expressed in US dollars, GDP per capita fell from $8,656 in 2011 to $5,994 in 2015, reflecting the country’s struggle in the battle against increasing levels of poverty.
South Africa’s trading partners
South Africa’s major overseas trading partners, measured by the percentage of our exports that each one absorbs, are the Eurozone (16%), China (10%), the USA (9%), India (5%), Japan (5%) and the UK (5%). We will focus on the three biggest players, who collectively buy some 35% of our annual exports.
As never before in its history, the Eurozone faces threats on a number of fronts, the sum of which threaten its very existence. Several European countries are struggling with fiscal challenges (relating to low levels of tax collections and a lack of infrastructure spending), not to mention a large inflow of refugees. Europe also has to confront a change in trading relations with two of its key export markets, the UK and the US.
Following the UK’s Brexit vote the nature of any trade agreement with Europe is still to be hammered out, whereas the advent of President Trump in the US has raised the spectre of protectionism on the part of the Americans, and lower levels of trade with the Eurozone. Nationalism is also raising its head in Europe, where populist movements in France, Spain, the Netherlands and Austria threaten to bring an end to the Eurozone experiment.
As a result of these factors, economic growth in the Eurozone is expected to be flat for the next few years, averaging about 1.6% compared to 2016’s 1.7%. Although there will be a move towards infrastructure investment, supported by a very relaxed monetary policy (i.e. plentiful cheap credit) there are a number of factors that will drag back economic growth. These include structural constraints, high levels of debt, and high unemployment in certain member states.
Low levels of confidence among consumers, businesses and investors are all expected to dampen demand for imports. Imports into the Eurozone are expected to increase by about 4% per year to 2021, well below the pre-2008 average of 6% per annum. As a result, South African exports into this region are not likely to enjoy much growth in the foreseeable future, and could be threatened by weaker household demand for motor vehicles, parts and accessories, and fruit. These products make up about 41% of our current exports to Europe, and indirectly affect the exports of platinum group metals (PGMs) as well.
Trade with China
Structural changes in China’s economy have been underway for a while now, as China’s policy-makers try to reduce their reliance on huge fixed investment spending and export markets. Although the original strategy earned China the title of ‘the world’s factory’, the intention now is to move towards a greater reliance on domestic consumer expenditure, and the expansion of its services sectors. However, such policy changes have resulted in declining demand for imports, especially in the area of commodities. Economic growth in China is forecast to be 6.5% in 2017, down slightly from 2016’s 6.7%.
The threat by Donald Trump to impose high import tariffs on Chinese goods could be problematic, not only for the Chinese but for all who export to China. Should Trump follow through on his threat, China might speed up their move towards a growth policy based on domestic consumption. This will impact negatively upon all of China’s trading partners, as will a trade war with the US.
Although South African exports to China should remain relatively stable in the short term (and be boosted by a recovery in commodity prices), lower demand for our iron, chrome and manganese ores are likely in future. However, as China’s economic make-up changes, opportunities to export consumer products such as food and wine might increase, along with other manufactured and intermediate goods.
Doing business with America
The world outside of the USA is still trying to come to terms with the idea of Donald Trump in the White House. Whether the 45th president of the US will be a breath of fresh air or a hurricane of destruction remains to be seen. Trump’s stated intention to circle the economic wagons around the US, and to restore American jobs to Americans, might signal the start of an isolationist era where exports to America shrink in the medium to long term.
The year ahead should be good for South Africa as the US economy continues to grow, and Trump’s promised infrastructure programme increases the demand for our commodities. What happens beyond 2017, however, is anyone’s guess. What will count in South Africa’s favour is the fact that our trade with the US is fairly balanced, with imports virtually matching exports. As a result, we could escape punishing trade tariffs as the Americans target those with whom they have big trade deficits.
Interestingly, the business community has reacted enthusiastically to Trump’s presidency. The Dow Jones has increased by 10% since his election victory, and at the time of writing (in the last week of January), hit the 20 000 mark for the first time in its history. US stock markets traditionally rise during the first year of a new presidency, but this time around the effect could be even greater than usual. Being invested in American stocks could be a good bet in 2017.
Challenges and threats
The biggest threats to the South African economy in 2017 could, ironically, come from within. Here are the two main issues we should be worried about:
- Political uncertainty. Corruption scandals involving President Zuma have caused ructions within the ANC, with renewed calls for his resignation. Markets thrive on stability and confidence, whereas a lack of both can seriously undermine the investment environment. At the time of this article President Zuma was yet to announce his expected cabinet re-shuffle. This could herald the first economic shock of 2017, as discussed below.
- Ratings Agency Downgrade. South Africa dodged this bullet in 2016, but may not be so lucky in 2017. The ratings agencies will review our position in mid-year and at year-end, although were Zuma to remove finance minister Pravin Gordhan from his position before then, this could lead to an immediate junk rating. A weaker rand, a short-term rise in interest rates, and a swift reversal of investment flows are likely to result. An economic recession could easily follow.
South Africa needs strong economic growth to deal with its internal challenges. Poverty and inequality are two of the biggest - we have a highly unequal economy, with the top 10% of the population accounting for 58% of the country’s income, while the bottom half of the population produces less than 8%. The government plans to build a more inclusive society and eradicate poverty by 2030, but to do this will take mature leadership and wise stewardship of the economy. Let us hope that 2017 takes us on the first step of that journey.
AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.