Economy faces the worst of both Worlds

South Africa’s economy is faced with the worst of both worlds – a combination of rising inflation and stagnant GDP growth, which leaves little room for manoeuvrability, said André Roux, economics professor at the University of Stellenbosch Business School (USB). Roux was one of the speakers at a seminar hosted by the USB and the Institute for Futures Research (IFR) where the developments in the economy, politics, technology and their influence on the country were discussed. “Economically-speaking the year 2016 sucked,” Roux said in his overview of the state of the world economy, “but the next two years will also suck from the hangover of what happened in 2016.”

Besides the threat of protectionist utterances by world leaders, such as US President Donald Trump, which could lead to a slowdown in global goods trade growth among others, the world is facing tepid economic growth and low inflation. “There is also a growth in government debt worldwide – a result of the solutions world economies applied to solve the 2008 global economic recession,” Roux said.

In addition, interest rates are at historical lows, except in the US where there’s a slight uptick and where modest increases are expected over the next few months. Shifting to China, Roux said the country is re-calibrating its economy by reducing its reliance on consumer goods and replacing it with services and by encouraging consumer spending. “In this period of adjustment there has also been a slowdown in the Chinese economy from about 10% growth down to 6.6%. This in turn has a bearing on commodity prices,” Roux said.

h3. South Africa’s “Yellow Card”

Looking at South Africa, Roux said there have been “handsome increases” in GDP per capita, but coupled with that South Africa has faced considerable inflationary pressures. He named a number of issues and constraints South Africa has to deal with currently such as a drop in agricultural output due to the drought the past year and mining production as a result of the drop in commodity prices. “Agriculture and mining are responsible for 50% of our exports, so if output in these sectors drops, it’s significant,” Roux said.

Unfortunately, South Africa has painted itself into a corner with regard to its ability to use policy to direct the economy – by and large as a result of the steep increase in debt as a percentage to GDP. “A few years ago that figure was 26%, but it has crept up to over 50% nowadays,” Roux said. “And it bothers investors, because it grows so rapidly and the economic prospects are so low.” In addition, “quite a bit of this debt”, Roux said, was used to finance social grants and civil servants’ salaries, Roux added.

He is of the view that South Africa is still at risk of a credit ratings downgrade later this year. “We’ve been shown a yellow card on two occasions,” Roux said and cited a forecast by World Bank senior economist Marek Hanusch as an example of how exactly a sovereign credit ratings downgrade could affect South Africa. Had South Africa been downgraded in 2016, according to Hanusch, short-term borrowing costs would have gone up by 60 basis points, 1% would have been shaved off South Africa’s GDP, South Africans would each have been R1 000 worse off and 160 000 South Africans would have been pushed into poverty. On the upside Roux believes GDP could grow to 1.1% in 2017, thus avoiding a full-blown recession.

There are risks to this “more benign” outlook, Roux said, such as state capture, populism, exchange rate volatility (although the rand has shown good recovery the last couple of months) as well as the possibility of a ratings downgrade to junk status.

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