GDP slump is a bump in the road, but this train is still on track
What “Ramaphoria” offered the South African economy was a breath of confidence after the sustained battering from years of poor governance under the Jacob Zuma administration. But confidence alone doesn’t automatically mean growth in the real economy: there’s still much work to be done, given the worse-than-expected 2.2% contraction in first-quarter GDP reported this week. While historically the first three months of the year are slow growth periods given the hangover of the summer holidays as well as the Easter period, the figure is by any measure alarming. The VAT increase — largely unavoidable given the state of the national coffers — and the continued rise in fuel prices, which this week hit a record high, have also affected the economy. Given our dependence on road transportation of not only goods and services but the vast majority of employed South Africans, we can only expect soaring fuel prices to seep into every nook and cranny of the economy. They will, for example, feed into wage demands just as the sunset industry of gold mining embarks on its negotiations.
These developments have proved deflating to the hype that surrounded the “New Dawn” promised by President Cyril Ramaphosa.
Over the short term, the outlook doesn’t seem to be getting any better. The fallout from emerging-market debt woes across global markets will keep pressure on the rand, among the worst performers against the US dollar over the past month.
A weakening rand against the backdrop of a rising oil price doesn’t bode well for inflation. Whereas at one stage the Reserve Bank seemed to be in a position to cut interest rates as inflation seemed set to remain within its targeted range of 3% to 6%, the bank now looks more likely to at best keep rates unchanged.
In a worst-case scenario, before the year is up the bank may have to raise rates if the geopolitics largely shaped by one Donald Trump continue to boost oil prices.
It’s never healthy for a country to rely on low borrowing costs to stimulate its economy, but, due to a shrinking manufacturing base and a less buoyant mining industry for now near a decade, it is left to consumers — encouraged by low rates — to keep the economy ticking.
So it’s indeed a precarious position we are in. What should be comforting is that for the most part, we’ve stopped shooting ourselves in the foot. The factors that may serve to keep the economy in a difficult spot are all exogenous, largely out of our control. Just how Trump deals with Iran, North Korea and the “trade wars” he is drumming up to deflect attention from the legitimacy of his presidency is something over which nobody has control. South Africa’s politics aren’t being highlighted as a cause for the skittishness with which global investors are now viewing emerging-market nations.
The political changes of the first half of this year have brought a much-needed bout of confidence to South Africans and global investors. The end of Zuma’s term, the appointment of a new president and the reshuffling of some key ministries were important steps in getting the country back on track. The inaction of ratings agencies this year is proof of changing sentiment towards the country. The politics of the governing party have bought the country some time to right the ills of the past decade.
The government should use the time well and deliver on the many promises of the New Dawn, dealing with corruption, no matter how prickly the situation for the ANC. On the Mining Charter, it must find that middle ground between the transformation needs of the sector and its profit drivers. It must highlight the positives of land redistribution as a means to deal with ever-growing inequality.
While in the short term there seem to be many roadblocks on the path of growth, our medium- to long-term outlook provides more than a glimmer of hope.
For the most part, we’ve stopped shooting ourselves in the foot