At the outset it needs to be stated that the correlation between South Africa’s economic growth and that of the world economy has increased enormously over the past 15 years. The global economy’s woes have been driven by a massive increase in personal and financial debt over the past two decades which is going to take several years to unwind. However, given the massive fiscal and monetary stimulus injected into global economies by the world’s leading nations over the past year, some recovery in global economic activity is likely to eventuate in the medium term. In line with this expectation, commodity prices have rallied over the last three months, as too have equity prices. One’s concern is that, although the stimulus packages might prevent the global economic downturn from being quite as severe in the short to medium term as might otherwise have been the case, they stand to generate significant problems in the longer term by reigniting inflationary pressures and increasing public debt levels enormously. As a result, one might well find a renewed steep economic downturn in a few years’ time following a medium term respite.
Fortunately, the South African economy stands to perform slightly better than the majority of the world’s economies for a number of reasons. Although the correlation between South Africa’s economic growth and that of the world is high, it is even higher in respect of the relationship between South Africa’s economic growth and that of emerging markets, most notably China and India. The latter have enormous demand for resources to accommodate programmes of rapid urbanisation. Therefore, the demand for raw materials, of which South Africa is one of the world’s leading suppliers, tends to fluctuate in line with the rate of growth in the economies of the world’s most populous countries. This process of urbanisation is unlikely to be curtailed. As a consequence, positive growth is still forecast for emerging markets this year and next notwithstanding the negative impact on exports from these markets to advanced economies as a result of the recession in the latter. Therefore, if these emerging markets continue outperforming the economies of industrialised countries, it follows that South Africa likewise should be able to record superior growth to that of the advanced economies.
There are other reasons for relative optimism regarding South Africa’s economic performance. Firstly, interest rates have been reduced by 4.5% since December. Even though household debt levels are still close to their record highs of last year, the sharp reduction in the interest burden on debt resulting from lower interest rates should assist in improving the balance sheet of households in such a way as to encourage them to resume spending before too long, even if at a somewhat subdued level. The negative wealth effect created by falling house prices and the fairly steep decline in share prices on the JSE, mean that consumers are likely to be that much more cautious than they were a few years ago. As a consequence, one does not expect any rebound in consumer spending in the latter part of this year to be particularly robust. Nonetheless, there will also be a marginal benefit in the form of increased foreign tourism resulting from the holding of a series of high profile international sporting events in South Africa in 2009. This is even before one even begins to talk about the 2010 Soccer World Cup.
South Africa also stands to perform relatively well because of the soundness of the banking system. Nonetheless, one needs to be cautious in one’s optimism on this front, as the banks domestically have embarked upon such tightening of credit requirements that they themselves appear to be responsible for exacerbating the depth of the domestic economic downturn. In the process they have been acting almost in the same manner as their overseas counterparts, despite their supposed lower exposure to toxic assets.
Thirdly, South Africa’s economy stands to benefit from the healthy fiscal state of government finances. Public debt to GDP has declined to one of the lowest levels in the world, opening up the fiscal space for government to spend more rapidly as a means of counteracting the effects of global recession on the private sector. Integral to this attempt at fiscal expansion is the infrastructural investment programme began a few years ago and currently underway in earnest in preparation for the Soccer World Cup. Finally, the latter event itself should not be underestimated as a potential booster to economic growth.
Unfortunately, relative optimism with regard to the performance of the real economy translates into relative pessimism with regard to the ability to reduce inflation. Especially in light of the increased cost of services and in particular electricity costs over the coming year, it is debatable as to whether government can actually attain its inflation target over the coming year. That being so, the prospect for significant further interest rate cuts is unfavourable and on the contrary, one might need to look at interest rates rising back up again during the course of 2010.
The Rand has been unbelievably strong in recent months despite South Africa having one of the largest current account deficits in the world, which makes the country proportionately more dependent on capital inflows than most others. Essentially, the increased optimism regarding the medium-term outlook for the world economy has translated into increased risk appetite, especially for assets in emerging markets. Given South Africa’s solid fiscal conditions, as well as the relatively successful passage of the general election in June, international investors have been committing significant funds to the country and this has translated into currency strength. The correlation between the trade weighted value of the Rand and the Dow Jones industrial average is very significant.
In conclusion, one can be relatively optimistic that South Africa’s economy might fare somewhat better than those of industrialised countries and, for that matter, many emerging markets. However, this does not absolve one from recognising that the economy is still tightly linked to the fortunes of the global economy and as such economic growth is likely to be substantially lower than it was during the earlier part of the decade for a considerable period of time. Looking further ahead, the biggest challenge facing the country and its economy is the shortage of skills and inadequately educated public sector officials. Not only does this lead to inefficiency in service delivery, but it also contributes towards higher inequality. In addition, many of the country’s unemployed are unemployable in the sense of not being able to offer a skill which the marketplace requires. These issues are then intimately linked to the rising level of inequality in the country which breeds high levels of crime. Unless leadership is exerted to improve the quality of education and skills, the South African economy will be unable to achieve its full potential in the longer term.