SA economy on path to faster growth

The Star Early Edition - - PRICES - Dr Chris Harmse

IT IS ex­pected that the South African economy will im­prove this year. Ev­i­dence al­ready ex­ists that the economy is in a cycli­cal up­turn, since the sec­ond quar­ter of 2016. The base­line sce­nario for the economy in­di­cates that eco­nomic growth will be more than triple the ex­pected growth rate of 0.4 per­cent for last year.

Do­mes­tic mo­men­tum will fol­low the al­ready up­ward trend of the de­vel­oped world and South Africa’s main trade part­ners. It is ex­pected that the world economy will grow above 4 per­cent this year, up from the 3 per­cent last year. The bet­ter-than-ex­pected rain­fall in the sum­mer crop ar­eas of the coun­try, higher in­ter­na­tional com­mod­ity prices, bet­ter man­u­fac­tur­ing growth and a much stronger rand will sup­port the up­swing.

One, how­ever, has to be cau­tious on the strength of the ex­pected eco­nomic im­prove­ment, as do­mes­tic and global eco­nomic and geo-po­lit­i­cal risks may af­fect the base­line sce­nario.

Base­line sce­nario

The base­line sce­nario is set with the as­sump­tions that South Africa’s sov­er­eign debt will not be down­graded to junk sta­tus, that the US will increase its bank rate three times by 25 ba­sis points each dur­ing the year. It is also as­sumed that we will ob­tain a nor­mal sum­mer crop for maize and even ex­port. It is also as­sumed that the Mon­e­tary Pol­icy Com­mit­tee of the Re­serve Bank (MPC) will increase the repo rate twice by 25 ba­sis points each time.

It is also ex­pected that Brexit will not af­fect the coun­try’s ex­ports to the UK and Europe, and that the pound will re­main un­der pres­sure.

Lastly, it is as­sumed that the min­is­ter of fi­nance will de­liver a bud­get in line with the cur­rent medium ex­pen­di­ture frame­work. Also that wage ne­go­ti­a­tions will not dis­rupt the min­ing, man­u­fac­tur­ing and other sec­tors in the economy. It is also ex­pected that the Chi­nese economy will main­tain its cur­rent level of eco­nomic growth of 6.7 per­cent.

Given the above as­sump­tions, the fol­low­ing base line sce­nario is en­vis­aged for South Africa’s macroe­co­nomic out­look:

The growth in the gross do­mes­tic prod­uct (GDP) of 1.4 per­cent; Av­er­age in­fla­tion rate for 2017 will be 6 per­cent; The deficit on the balance of pay­ments will de­crease from lev­els higher than 4 per­cent to 3.2 per­cent;

Cen­tral gov­ern­ment debt to GDP ra­tio will come down from 3.4 per­cent to 3 per­cent;

The un­em­ploy­ment rate will come down slightly from the cur­rent level of 27 per­cent to 26 per­cent;

The repo rate will increase from 7 per­cent to 7.5 per­cent; and

The rand/dol­lar ex­change rate will vary be­tween R13 and R14.50.

Global and do­mes­tic risks

The above base­line sce­nario may vary to the up­side or down­side de­pend­ing on the mag­ni­tude and in­flu­ence of var­i­ous global and do­mes­tic geo-po­lit­i­cal and eco­nomic risks.

On the global front, the big­gest two geo-po­lit­i­cal risks will be the ef­fect of the US Pres­i­dent-elect Don­ald Trump’s eco­nomic poli­cies and the Brexit process. A fis­cal stim­u­la­tion pol­icy frame­work by the Trump ad­min­is­tra­tion will have a positive ef­fect in the short run on the US economy and the de­vel­oped world. In­creased com­mod­ity prices and a stronger US dol­lar are likely to boost ex­ports and eco­nomic growth of emerging economies.

On the down­side, how­ever, an over stim­u­la­tion of the US economy will have im­me­di­ate and strong ef­fects on the US in­fla­tion rate. Higher-than-ex­pected in­creases in US in­ter­est rates is likely to harm emerging economies like South Africa more than the ben­e­fits of a US fis­cal stim­u­la­tion. A more-than-ex­pected weak­en­ing of the rand will put pres­sure on the do­mes­tic in­fla­tion rate and in­ter­est rates. The African Growth and Op­por­tu­nity Act of the Obama era may also be un­der threat, and that may im­pose a se­ri­ous ex­port risk for South Africa.

Apart from the neg­a­tive ef­fects of the Brexit pro­pos­als on the Euro­pean economy, ex­port prospects for South Africa to both the UK and Europe may turn sour. A sud­den down­turn in the Chi­nese economy may also im­pose a se­ri­ous threat to South Africa’s ex­ports and on com­mod­ity prices.

The re­main­ing ma­jor global risk for South Africa this year re­mains the pos­si­bil­ity of a junk rat­ing by the rat­ing agen­cies. The rat­ing agen­cies will have a close look on the na­tional bud­get in Fe­bru­ary, the prospects for eco­nomic growth and un­em­ploy­ment, as well as po­lit­i­cal fac­tors around the ANC na­tional congress at the end of the year. The Hawks in­ves­ti­ga­tion around the fi­nance min­istry, as well as the state of the nation ad­dress and the prospects for sound state en­ter­prise man­age­ment will all bear on the rat­ing agen­cies’ radar.

Man­u­fac­tur­ing pro­duc­tion and re­tail sales will con­tinue to strug­gle and im­prove only mar­ginal dur­ing the year and the de­mand for new mo­tor ve­hi­cles will re­main low. Res­i­den­tial prop­erty prices are ex­pected to move side­ways and will increase by less than the in­fla­tion rate. n Dr Chris Harmse is the chief econ­o­mist of Re­bal­ance Fund Man­agers

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