Sluggishness with a Volatile Mix

Sluggishness with a Volatile Mix

Every quarter Econometrix presents an economic analysis to its clients, and the information supplied plays an important role in the business decisions and strategic direction of these clients, for the short, medium and long term. aBr attended the presentation on 1 February 2016, and we were all ears, with the underlying theme of the presentation, by Dr Azar Jammine, chief economist and director at Econometrix, being one of “batten down the hatches.” I give you a precis of what he said, with a dash of aBr spice added to his observations.

Of course, it depends on your definition of “batten down the hatches.” It would be hyperbolic to expect very stormy seas, whereas if you are only expecting a few squalls then you are underestimating the forecast. The prognosis is somewhere in between – 2016 through to 2019 is not going to be a bed of roses, but then again, it will not be catastrophic. When analysing the global economy, Jammine paints three scenarios. The first scenario (very stormy seas) is a major decline, exacerbated by a China crash, US monetary tightening, falling commodity prices, and geopolitical factors. The second scenario (a bed of roses) is a strong recovery, fuelled by low oil prices, population growth and urbanisation, technological progress, and structural reforms. The third scenario (somewhere in between) is the one that Jammine plumps for. He calls it the “new normal”, and what it means is that for the foreseeable future the global economy will be characterised by sluggishness with volatility.

As Jammine says, to understand this, we need to know where we have come from. We’ve has massive gains in technology and information systems, we’ve had too much personal and financial debt, a commodity price boom during the first decade of this century, and a global financial crisis that has generated an environment of “once bitten, twice shy.” Now we’re in a period of relative stability, created ironically by an environment where the financial markets are absorbing the shocks.

But we definitely cannot expect plain sailing because there are just too many global financial risks, such as the pending tightening of US monetary policy, the repatriation of funds to the US, a slowdown in China, lower commodity prices, and geopolitical risks. And of course the ultra-loose monetary policy that is currently seizing the globe brings extra risks, such as encouraging consumption versus production, rising inequality, corruption, and the risk of inciting populism.

Of course, it is not all gloom and doom. Much has been learned from the previous financial crises, and appropriate non-intrusive legislation has been enacted, together with appropriate tax laws. And there are huge restructuring opportunities, and the global demographics offer big things.

Now to South Africa. Jammine says that business confidence levels are low, for many reasons, chief of which are:

  1. Poor education and low skills levels
  2. Intransigent labour unions
  3. Electricity shortages – low demand has reduced this, but no thanks to Eskom
  4. Xenophobia
  5. Poor municipal services
  6. Poor leadership and management at parastatals
  7. Counterproductive government policy decisions and retractions
  8. The economic costs of empowerment of the few through exploitation on tendering, procurement, and licensing (aka cronyism)
  9. Perception of rising corruption and cadre deployment
  10. Perception by private sector that government is unwilling to listen and regards private sector as the enemy

However, there are positives, such as:

  1. Life expectancy levels are improving
  2. South Africa is an operating multi-level democracy
  3. The respect for an independent judiciary
  4. The protection of freedom of speech, freedom of religion, and the freedom of the media
  5. Strong financial institutions
  6. A developed financial market
  7. A free floating exchange rate

On balance, South Africa has to dig itself out of a big hole. Despite the inexorable depreciation of the Rand, there has been no growth in manufacturing, and little to show for it in export performance. The only bright light in export performance has been the vehicle industry, with 24% growth in 2015. Job growth has been anaemic, with only 0,8% growth since the financial crisis. The harsh reality is that the economy is not creating jobs in a low employment environment. And in this low employment environment, the unions are pushing for higher wages and a minimum wage. Throw into this mix the worst drought in living memory, and we have a volatile mix, or in other words, sluggishness with a volatile mix.

The South African economy, with its budget deficit, is heavily dependent on capital inflows, and unfortunately these are not forthcoming, and in 2015 the reverse happened, with capital outflows damagingly big. Global investors have lost their appetite for South Africa, so something has to be done to get them interested again, and of course, change at the helm of South Africa Inc. would work wonders. We can dream, but back to reality.

The Rand will continue to underperform, inflation will reach scary levels by the end of 2018, and economic growth will remain low. The only light at the end of the tunnel is that the Reserve Bank’s actions may be enough to avoid a downgrade by the rating agencies.

But the real bummer for our industry, is that Jammine expects car sales to contract by anything from 5% to 10% in 2016.

The Rand

Econometrix forecasts that the Rand will stay undervalued:

                2016       2017       2018       2019

R/$         16,43     15,17     16,26     17,64

R/€         17,62     16,39     18,85     19,93

R/£         24,32     22,91     25,05     27,16


Econometrix predictions:

                              Avg.       Year End

2016                       7,2%      8,2%

2017                       5,3%      4,4%

2018                       4,4%      4,3%

2019                       4,9%      5,4%

Economic Growth:

Econometrix’s prognosis:

                                                  2016       2017       2018       2019

GDP Growth                                 0,2%      2,2%      2,2%      1,9%

Private Consumption                     -0,2%     2,8%      2,4%      1,4%

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