A much improved global economic environment is providing support for strengthening growth in South Africa, with a stabilising rand and lower inflation expected to pave the way for interest rate cuts in the second half of 2017.
This is according to Johann Els, who presented at Old Mutual Investment Group’s first quarterly investment update for the year today, where he shared his views that tight fiscal policy, following a well-received Budget, and fading economic shocks, such as the commodity price slump and drought and food inflation, are all contributing factors to the case for an SA growth recovery this year.
Els says that despite recent political uncertainty, there is a sharply improved short-term cyclical outlook for South Africa compared to this time last year. “The stabilising rand could surprise on the strong side, we are seeing falling food and headline inflation and rising exports are contributing to a narrowing trade and current account deficit,” he explained.
Focusing on the stabilising rand, Els said that this can be attributed to a commodity price rebound, a recovery in other peer or emerging market currencies, the narrowing of the trade deficit and the reduction of the ratings downgrade risk following a good Budget. “As such, we expect the SA Reserve Bank to maintain rates for the first half of the year, but they are unlikely to try and prevent further rand strength,” he said.
When it comes to consumers, Els believes that, despite a challenging first half of the year and tough Budget, the environment is largely looking better. “The Budget might seem a bit harsh for consumers, but this will be balanced by lower inflation and interest rates in the second half of 2017, with real wage growth and some job growth,” he explained.
Els says that, unfortunately, medium to longer term growth prospects are not promising without meaningful economic reform, with risks still on the horizon from the threat of a strengthening dollar, waning Chinese growth and ongoing political uncertainty in the US, Europe and at home . “However, we expect growth to rise further to about 1.3% in 2017, with a possible upside surprise in growth if Emerging Markets remain in favour and confidence improves.
“Slow economic growth, combined with a better inflation outlook should not only assist the Reserve Bank from hiking rates further, but will likely lead them to cut in rates during the second half of 2017.”
On the global economic front, Els points out that while growth is still slow, it has picked up pace since 2015 and recent data is looking stronger. “We are seeing better and more synchronised growth globally, led by the US, Japan, China and some of the other Emerging Market countries,” said Els. “In addition, consumer incomes have improved on a wage growth uptick and commodities have troughed.
“Inflation too, is ticking higher globally, with supportive monetary policy, widespread fiscal expansion and the Fed due to hike three times by 25 basis points each later in the year. The dollar is also stable currently, and we expect it to move sideways or even slightly weaker. However, the dollar remains one of the uncertainties surrounding the global environment, as well as fiscal stimulus, higher bond yields and risks posed from abroad for the US.”
Els elaborates on the impact of US policy on the dollar by explaining that this will hinge on President Trump’s ability to implement his election promises. There are two scenarios we can expect. “Firstly, we could see the full implementation of his election manifesto. This would lead to huge fiscal stimulus and a tough trade environment,” he said. “This would mean a macro-economic and global fallout, with the dollar surging, falling US inflation on the strong dollar and commodity price slump, a slowing US economy in 2018 based on external pressure as the rest of the world faces recession, and lastly we would see Fed hikes in 2017, followed by a flat 2018.”
A compromise solution, according to Els, would see decent, but not extreme, fiscal stimulus and moderate trade restrictions. “This would lift US GDP by the end of 2018, with the Fed hiking rates moderately. The dollar would move only moderately firmer, or could stay flat, and we could see a decent lift to overall global growth as the US recovery boosts commodity prices and global confidence. This scenario would also be good for global risk assets,” he explained.