SA’S ONE-PER­CENT FIX

Firmer global growth, a softer oil price and a cau­tious Fed are ideal eco­nomic con­di­tions for SA. It’s a pity it has been un­able to turn them into growth in the midst of ‘the broad­est syn­chro­nised up­swing’ in years

Financial Mail - - FEATURE / ECONOMIC GROWTH - Claire Bis­seker bis­sek­erc@fm.co.za

Prior to the global fi­nan­cial cri­sis, SA thought of it­self as a 3% econ­omy, but by 2015 its growth po­ten­tial had fallen to 2%. Last week the Re­serve Bank made it of­fi­cial: SA’S growth po­ten­tial is now just 1.1%, and may have fur­ther to fall.

“SA’S fall­ing growth po­ten­tial is a func­tion of con­sis­tently dis­ap­point­ing GDP growth since 2009,” says the Bank’s head of re­search and sta­tis­tics, Rashad Cas­sim.

“The de­cline in SA’S po­ten­tial growth rate shows you that this is a stag­nant econ­omy . . . in fact, it is com­ing to a grind­ing halt,” he says.

The mea­sure­ment of po­ten­tial growth (how fast an econ­omy can grow with­out stok­ing in­fla­tion) is based on ac­tual data as op­posed to fore­casts, in­clud­ing what’s hap­pen­ing to in­di­ca­tors such as fixed in­vest­ment, em­ploy­ment, cap­i­tal ex­ten­sion, ca­pac­ity util­i­sa­tion and GDP.

Rand Mer­chant Bank chief economist Et­ti­enne le Roux says job-shed­ding, the con­trac­tion in real fixed in­vest­ment and the drop in to­tal fac­tor pro­duc­tiv­ity (po­ten­tially due to fall­ing in­vest­ment in ma­chin­ery and equip­ment, stag­nant spend­ing on re­search and de­vel­op­ment, and poor skills de­vel­op­ment) ex­plain the con­tin­u­ous de­cline in SA’S po­ten­tial growth rate over the past five years.

Cas­sim cau­tions against be­com­ing too hung up on a pre­cise fig­ure for SA’S po­ten­tial growth rate, given the large mar­gin of er­ror in mea­sure­ments of this kind. But though the Bank is not very con­fi­dent about the pre­cise num­ber, it is rel­a­tively cer­tain about the di­rec­tion of change — ever down­ward (see graph).

So how much lower could SA’S growth po­ten­tial go?

If SA ex­pe­ri­ences sev­eral more quar­ters of neg­a­tive GDP growth, its growth po­ten­tial could be­come “in­cred­i­bly low”, ac­cord­ing to Cas­sim. But if it rises in line with the Bank’s real GDP growth fore­cast (0.5% this year, 1.2% next year and 1.5% in 2019), then it should re­main at about 1%.

Cas­sim is a mem­ber of the mon­e­tary pol­icy com­mit­tee that voted to cut in­ter­est rates last week on the ba­sis of SA’S im­prov­ing in­fla­tion pro­file and wors­en­ing growth out­look.

Not­ing that a num­ber of sen­ti­ment in­di­ca­tors and data points have reached lev­els last seen in 2009, at the height of the global fi­nan­cial cri­sis, the Bank halved its 2017 real GDP growth fore­cast to 0.5%, cut the coun­try’s growth po­ten­tial from 1.3% to 1.1% and widened its out­put gap pro­jec­tion (the gap be­tween ac­tual and po­ten­tial out­put) from -1.6% to -1.9%.

“The fact that SA’S out­put gap has got wider even though the po­ten­tial GDP growth rate was re­vised down is say­ing that there is more slack in the econ­omy than we thought there was,” ex­plains Cas­sim.

In other words, the Bank can af­ford to be a lit­tle more com­pla­cent about in­fla­tion.

Thanks mainly to lower oil prices, fall­ing food in­fla­tion and a re­silient rand, con­sumer in­fla­tion has soft­ened in re­cent months.

The Bank now ex­pects the con­sumer price in­dex to trough at 4.6% in the first quar­ter of 2018 and to av­er­age 5.3% this year and 4.9% next year.

In­fla­tion has been fall­ing faster than ex­pected in many emerg­ing mar­ket coun­tries, thanks mainly to a sharp fall in global oil price in­fla­tion. Brazil, Rus­sia and In­dia have all cut rates re­cently.

The rand re­mains the big­gest risk to SA’S in­fla­tion out­look. Its re­silience so far this year is partly due to the pos­i­tive global sen­ti­ment to­wards emerg­ing mar­kets as a whole, the high yield dif­fer­en­tial be­tween SA and de­vel­oped mar­kets, and SA’S im­proved cur­rent ac­count bal­ance.

Even so, most economists had ex­pected the Bank to de­lay the start of its rate-cut­ting cy­cle for fear that the rand re­mains too ex­posed to pos­si­ble cap­i­tal out­flows, whether trig­gered by the US Fed­eral Re­serve’s rate-hik­ing cy­cle or by fur­ther do­mes­tic credit down­grades and po­lit­i­cal con­tes­ta­tion.

Last week, how­ever, the mon­e­tary pol­icy com­mit­tee sounded more san­guine re­gard­ing the risks posed by US mon­e­tary pol­icy nor­mal­i­sa­tion. It noted that the grad­ual na­ture of the Fed’s bal­ance-sheet con­trac­tion has been well-com­mu­ni­cated and ap­pears largely priced in by the mar­kets, and that — so far — the re­ac­tion of emerg­ing mar­ket as­sets has been “rel­a­tively muted”. As such, a re­peat of the 2013 “ta­per tantrum” is not ex­pected.

This po­si­tion chimes with the global con­sen­sus that emerg­ing mar­ket coun­tries are bet­ter poised to weather a Fed hik­ing cy­cle than pre­vi­ously.

David Lu­bin and Michel Nies of Citibank iden­tify a num­ber of rea­sons why this is so: de­vel­oped coun­tries’ mon­e­tary-pol­icy ad­just­ments are grad­ual and priced in; cap­i­tal out­flows from China are un­der con­trol and the coun­try’s growth is sup­port­ing emerg­ing coun­tries’ cur­rent ac­count bal­ances; and emerg­ing mar­kets’ fi­nanc­ing gaps have fallen as ex­ter­nal bal­ance sheets have im­proved, real in­ter­est rates are high and their cur­ren­cies are suf­fi­ciently cheap.

This prog­no­sis is re­in­forced by the In­ter­na­tional Mon­e­tary Fund’s (IMF) July World Eco­nomic Out­look, which low­ers the US econ­omy’s growth prospects very slightly

What it means: SA’S growth po­ten­tial has of­fi­cially de­clined to 1.1% and it is per­form­ing be­low even that re­duced mark

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