Johannesburg - 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 expected 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 6.7percent.
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.
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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.
* Dr Chris Harmse is the chief economist of Rebalance Fund Managers