Shaky global economy poses risks for SA
The global expansion is under threat, and this could pull the rug out from under SA’s own fragile recovery
The global expansion has plateaued, and though the world’s major economies are doing well enough for now, rising trade tensions and interest rates could send the global economy into a downturn by the end of 2020.
The early warning signs suggest that the supportive external environment that SA has enjoyed over the past two years — marked by firmer global growth, a rebounding China and rising world trade — may be changing.
"Though recoveries don’t die of old age, this one’s pretty old. Just as with people, getting older often means getting fragile. And this recovery is fragile," says Ira Kalish, Deloitte’s chief global economist. He was speaking at Deloitte’s Global Economic Summit in London last week, where the overall message was that there is significant risk of a global slowdown in the next three years.
The fear is that tighter monetary policy in the US and the possibility of Europe and others following suit could stress credit markets, which could in turn put pressure on companies (and countries) that have leveraged up.
Risks to the global recovery were also flagged by the International Monetary Fund (IMF) last week in its July 2018 World Economic Outlook.
Though the fund kept its global growth forecasts unchanged at 3.9% for 2018 and 2019, it warned: "The global expansion is less even, more fragile and under threat."
The IMF is particularly worried that the increase in international trade protection instigated by the US could derail global growth prematurely. World trade volumes contracted sharply in April 2018, giving the worst performance since May 2015.
This would be bad news for SA, whose performance is strongly correlated with global growth. SA has particularly strong trade links with Europe, which absorbs 24% of SA’s exports, and China, which sucks in almost 10% — including iron ore and coal.
Though the IMF notes that in many advanced economies economic momentum has petered out, it still believes that emerging economies, led by China, will prop up the overall global growth rate for the next two years.
However, though China still appears to be roughly on track to achieve its 6.5% growth target this year, some broad spending indicators suggest it may be cooling too.
Deloitte China’s chief economist Sitao Xu expects the country’s growth rate to settle eventually at about 4%, compared with an average of roughly 8% over the past 25 years.
China’s growth could slow due to the country’s deflating property bubble and the restructuring of its manufacturing sector, especially in the likely event that demand from Organisation for Economic Co-operation & Development countries falters as a result of harsher US protectionist measures.
The weaker growth outlook for both the eurozone and China raises the downside risks for SA over the medium term.
A slowing China also poses a danger to other countries in Africa, given that China’s resource-intensive growth path has underpinned the continent’s growth for nearly two decades. At the moment, though, rising oil prices have fuelled a recovery in oil-producing countries such as Angola, Nigeria and Ghana after a tough three years.
The IMF expects economic growth in sub-Saharan Africa to exceed population growth over the next couple of years, allowing per capita incomes to rise in many countries. But in order to boost their growth and resilience, it urges those that rely on commodity exports to diversify.
The big question for Africa is how to create employment in manufacturing in the face of intense competition and the rapid adoption of technology, says Martyn Davies, MD of emerging markets & Africa for Deloitte in SA.
Another important challenge for the continent, he feels, is to advance structural reform while enhancing governance and increasing foreign investment flows.
"In the absence of robust institutions, growth [in Africa] depends on the politics of the day," he says. "Regardless of the country, it’s important for emerging markets to do the sensible thing, starting with countering corruption and improving governance."
The IMF kept SA’s GDP growth forecast unchanged for 2018 and 2019 at 1.5% and 1.7% respectively, but the Reserve Bank cut its 2018 forecast from 1.7% to just 1.2% last week, citing indications that second-quarter growth will be "modest".
By contrast, the US continues to grow faster than its potential, helped by ongoing fiscal expansion.
However, the US economy is likely to decelerate over the next few years as monetary policy is tightened.
Should the Fed raise interest rates faster than expected due to, say, a significant inflation, growth or fiscal surprise, it could even precipitate a US recession.