China’s stuttering economy has knock-on effect on South Africa
It has become clear that the global economy faces three systemic threats, but the one which is all too often ignored poses particularly grave risks for South Africa. First, post-pandemic inflation in the US is forcing the Federal Reserve to raise rates aggressively, in all likelihood pushing the world’s largest economy into recession. Second, an energy crisis in Europe sparked by Vladimir Putin’s retaliation to sanctions will almost certainly mean recession in the UK and Europe. Finally, the outlook for the Chinese economy is starting to look increasingly dire. Although less understood than the first two dynamics, it is arguably this third factor that will have the most profound effects on the fortunes of South Africa’s own spluttering economy.
There are three challenges facing the Chinese economy. First, China’s zero-Covid policy has led to anaemic consumer spending and employment growth in what has been the growth engine of the global economy over the last three decades. Ever since the first outbreaks of Covid-19, retail sales and consumer confidence have been throttled by each wave of infection and ensuing lockdown. Youth unemployment is now a worrying 20%. This would have been unthinkable only a few years ago.
Second, Chinese monetary policy is essentially in a liquidity trap. Despite cutting interest rates to their lowest ever at 2.75%, and repeatedly cutting bank reserve requirements in an effort to encourage lending, appetite for loans is moribund.
Finally, fixed real estate investment has evaporated, with house prices and new home sales falling sharply. According to research from global financial services group Nomura, in some areas like Chongqing and Fuzhou new home sales are down almost 80% from a year ago, while overall they are down about 40% across the country.
Critically for South Africa, an economic slowdown in China has major implications for the price of commodities, of which China is by far the largest international consumer. With demand from China slowing, iron ore is down 60% since mid-2021, while copper is 30% lower since March 2021. Platinum – South Africa’s second most valuable export – is also 30% lower since March 2021.
What happens in the Chinese domestic economy therefore has material implications for the South African economy. The commodity boom in 2021 meant that SA could unexpectedly lower debt to GDP and budget deficit forecasts. In February’s budget, Finance Minister Enoch Godongwana boasted of an extra $12-billion in revenue from taxes on commodity producers, and projected a balanced budget by 2024 and debt to GDP peaking at 75% in 2025, both a year earlier than previous National Treasury forecasts.
With commodity prices having collapsed, February’s forecasts are starting to look increasingly unrealistic. In next month’s Medium-Term Budget Policy Statement, the minister may find himself caught between falling fiscal revenues and ever higher demands on the budget. Investors seem to be pre-empting such a budget squeeze; from trading at 8.5% in March 2021, the South African 10-year benchmark bond has weakened to almost 11%.
As corporate and income tax revenue has flatlined, windfall taxes from commodity producers are increasingly critical to South Africa being fiscally sustainable and avoiding a debt spiral. Furthermore, with the economy already battling rolling power cuts and crumbling infrastructure, a struggling resource sector will make it increasingly likely that South Africa will succumb to a third crippling recession in four years.
Faced with this predicament, Godongwana must be hoping that President Xi Jinping can somehow resuscitate China’s waning economic predicament. Only then will commodity prices recover and South Africa’s growth and fiscal outlook may improve. Unfortunately for the minister and the plight of the South African economy, this is looking increasingly improbable.