Weathering the Economic Storms

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4 February 2019
From a political and economic standpoint we are in the midst of a classic highveld thunderstorm. The kind that arrives after a hot and humid morning; suddenly the world becomes dark, there is the smell of rain and you can hear the thunder and lightning in the distance as the storm approaches, and once overhead the thunder and lightning is so violent you wonder if the world is about to end.

 


There is a similar storm brewing in the global economy. The global political situation has shifted significantly over the last few years, as China, a so-called emerging economy, is on track to become the largest economy in the world, unseating the United States – which has been the world’s largest economy since the late 1800s!

Global politics has changed dramatically over the last few years, becoming much more nationalist (i.e. focused more on local issues, such as unemployment, and the local economy). The election of Donald Trump is a great example of this, BREXIT (where the UK is about to leave the Eurozone on the 29th of March 2019) is another.

The escalation of the trade war has a political element to it, and it has effects both politically, and economically across the globe.

In all of this, sits South Africa, where aspects like the trade war, the economic growth the US economy, China’s slowdown in economic growth have an impact on the performance of our stock and bond markets.

Just take Brexit as an example, if the UK does leave the Eurozone on the 29th of March 2019, what happens to trade between the UK and South Africa on the 30th of March? No-one is absolutely sure.

Of course, it’s not to say that our own economic and political situation doesn’t impact on our markets. President Ramaphosa has recently commented in a speech at the World Economic Forum about the nine lost years in South Africa.

He was referring to the damage of corruption, policy uncertainty, mismanagement of government departments and state-owned-entities as some examples. There were of course other factors which counted against us. We are still heavily reliant on basic commodities, such as precious metals (gold and platinum) and iron and steel, whose prices have struggled over this period.

As a result of the above it is no surprise that our economy has performed incredibly poorly, especially over the last year, with GDP growth ending up at 0.7% for 2018.

Our economy is growing slower than our population, a fundamental problem in a country with such a high unemployment rate.

With an economy this fragile, significant changes in the cost of living, for example the recent fuel price rise, can trigger social unrest. Zimbabwe is an unfortunate example of just this, with supposedly the highest petrol price in the world.

The most recent inflation rate reported in South Africa was 4.5%, and relatively stable. Thankfully SA inflation is managed by our highly competent Reserve Bank and policy framework.

SA inflation is currently driven by supply factors, such as the rising oil and food prices, and not by consumer demand, meaning that the average South African is under severe financial pressure and not inclined to increase spending or borrowing unless economic growth improves strongly and the benefits are passed down to ordinary consumers in the form of increased employment and wage growth.

At the latest Monetary Policy Committee (MPC) meeting the South African Reserve Bank indicated that economic growth would remain sluggish, mainly as a result of weak private sector investment. The growth outlook for 2019 is rosier at 1.7% and 2.0% in 2020.

Consumer confidence in South Africa rose strongly at the start of 2018, driven mostly by the huge paradigm shift leadership at the ANC elective conference in 2018.

However, it has fallen over the year as the evidence of state corruption, poor economic growth and increasing unemployment hit the headlines via the state capture commissions, such as the Zondo commission.  

Relatively speaking, it is the same with the world economy. The World Bank recently released study of global economic prospects is subtly titled “Darkening Skies” and the conclusions are to be expected, with weakening growth partly as a result of heightened tensions around trade.

That said, other emerging market countries are expected to grow at around 4.2% in 2019 - more than double South Africa’s estimates. So, it isn’t as dark as it seems.

The big problem with looking at economic and market data is that it is backward looking. In other words it is telling you a story that has already happened.

As has been mentioned in our prior quarterly updates, government has undertaken a massive piece of work to change the direction of the state. Whilst it is hard to predict the long term outcome of South Africa, I can think of few other countries, developing or developed that would undertake such a radical, honest and complete scouring of its own affairs.

From cabinet to SARS, PRASA, DENEL, NPA, ESKOM and many others, the South African government has outed itself, is cleaning its own house and my hope is the private sector will understand the significance of these actions.

That’s the other thing about highveld storms, they rush up quickly and go just as quickly, leaving the air washed, the ground damp and a rainbow in the sky. 

 

Grant Locke
Head of OUTvest
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