Looking back at 2014 and the outlook for 2015

For the third year in a row, growth in the South African economy in 2014 turned out to be significantly weaker than had been hoped for this time last year. In part, this may have been attributable to the fact that global economic growth, especially in the second half of 2013, turned out to be softer than previously anticipated. However, domestic factors have begun to dominate in depressing South Africa's economic performance. This can be attributed to a loss of business confidence as a result of heightened industrial action and a growing perception that the government has not got the leadership or willpower to press through reforms which would overcome the structural weaknesses impeding the attainment of higher sustainable growth rates. In addition, growing disruptions in electricity supply have weighed on business confidence and growth. An associated intensification of concerns regarding electricity security has added to perceptions of a diminution in long-term sustainable growth and has resulted in increased reluctance to undertake significant new capital investment.

In the short term, a sharp fall in fuel prices should provide some boost to disposable income and is helping to stabilise growth in consumer spending. However, from a medium to longer-term point of view, the weakness of global economic growth which has contributed towards lower oil prices, has also depressed prices of many minerals which South Africa exports, thus neutralising much of the potential longer-term benefit of cheaper fuel.

Should some of the factors contributing towards the decline in business confidence be overcome in the coming year, economic growth for 2015 should turn out to be slightly better than that of 2014. Consensus forecasts are looking for economic growth of just over 2%, compared with levels of growth of around 1.5% in 2014. However, even this mild optimism might prove to be unfounded in the event of the Eurozone and Chinese economies weakening even more than the official forecasts suggest. The hope is that continuous loose monetary policy being adopted by advanced economies will prevent global economic growth from slowing too much. Even here, there are growing concerns about a disjuncture between rising asset prices stemming from loose monetary policy and the relative paucity of global growth. Locally, confidence continues to deteriorate while investment languishes due to growing scepticism about the government's ability to address the structural weaknesses facing the economy which keep depressing South Africa's sustainable economic growth rate.

Foremost amongst these weaknesses are poor educational outcomes and an inability to address heightened industrial action and avoid further disruptions to electricity supply.

The past year - underperformance compared

What stands out in assessing the economic performance of the past year is that our new year message a year ago expressed very similar sentiments to those we express now. In fact, this is the second successive year in which similar sentiments have been repeated. A year ago, we commented as follows: “the economic performance is somewhat weaker than had been anticipated at the beginning of the year, the hope is that 2014 might see a slight improvement". This conclusion can so easily be repeated now, reflecting on the performance of the economy in 2013 and the prospects for 2014. At the beginning of 2013, one had been hoping for economic growth close to 3% for the year. Unfortunately, following the course of the year, it now looks as though even 2% growth for 2013 will have been missed." One year later, we can repeat the same sentiments, arguing that at the beginning of 2014 one had been looking forward to economic growth of close to 3% for the year, whereas based on the current information available, the actual outcome will have been 1.5% at most. This means that the relative underperformance compared with expectations over the past year has been even greater than was the case in 2013.

Heightened industrial action - the main cause of underperformance

Without doubt, the main factor contributing towards the weaker-than-expected performance of the South African economy over the past year was the spate of aggressive industrial action in the platinum mining and metal industries. In particular, the prolonged strike in the platinum mining industry between the latter part of January all the way through to the end of June, sapped a lot of confidence out of the economy. It was not just the fact that spending power of 70,000 platinum miners was removed as a result of these miners not getting paid over this period. Almost as serious were the knock-on effects onto the miners' dependants in outlying regions of the country, as well as the adverse impact on the demand for supplies of both equipment and services to the industry from the manufacturing and services sectors. The metal industries strike which followed through the course of the whole of July was not as long in duration, but involved 220,000 workers and also had a major adverse impact on overall economic activity.

Increased concerns about electricity supply

The second main domestic factor depressing economic growth has been the heightened anxiety regarding the sustenance of electricity supply during the 4th quarter of the year. For a couple of years, Eskom has been forced to compel major suppliers to halt production intermittently in order to save on the usage of electricity to avoid load shedding. This restrained economic growth in both 2012 and 2013. The adverse impact on economic growth of uncertainty in electricity supply picked up in June with the reintroduction of load shedding for the first time in six years. However, it was especially in the 4th quarter that significant damage started gathering momentum with ever-increasing frequency of disruptions. It gradually became ever more apparent that many of the country's ageing power stations were breaking down to an increasing extent due to being overworked and not having been maintained sufficiently in earlier years as a result of the desire to prevent load-shedding. Delays in bringing the new Medupi and Kusile power stations on line exacerbated the problem.

Loss of business confidence and lack of fixed investment

The growing uncertainty regarding the security of electricity supply, together with the intensification of aggressive industrial action through the course of 2014, not only disrupted production and the ability to spend amongst the workers out on strike, but also damaged business confidence significantly.  Ructions within the Cosatu trade union movement itself heightened such tensions. Specifically, government was seen to be unable or unwilling to deal with errant trade unions. As a result, tensions in relations between employers and workers reached new all-time highs. In such an environment, local and international investors proved to be increasingly unwilling to commit to significant capital investment. More generally, capital investment has also been deterred by perceptions that government is not managing to carry through with its promises to implement the National Development Plan (NDP), which arguably is aimed at tackling the structural impediments to higher economic growth.

Growing acknowledgement of the ineptitude of management at parastatal organisations, partly as a result of inappropriate managerial appointments by government, is seen to be adding to the inability on the part of the public sector to deliver fully on implementing its own public investment programmes. The resultant reluctance of the private sector to invest contributed towards constraining growth of private capital investment to barely positive levels and in so doing, limited overall economic growth. It also threatens to constrain longer-term economic growth.

The Year Ahead

Looking ahead at the economic performance which might be expected for 2015, many of the factors outlined above which resulted in growth in 2014 turning out to be softer than initially forecast continue to plague medium term economic prospects. Conventional economic forecasts have South Africa's economic growth improving to between 2% and 2.5% in 2015, from levels of at most, 1.5% in 2014. However, as in previous years, there is a substantial risk that the scenario of slightly improved economic growth in the year ahead, does not pan out. Anxiety about the ability of leadership within government to take the necessary steps to implement the tenets of the NDP, still abound. Such negative perceptions have been entrenched by the nature of Cabinet appointments made after the general election in May. Awareness of the conflicting attitudes towards the NDP has been heightened by the ructions within the Cosatu movement within the tripartite alliance. Disruptions to Parliamentary processes seen in recent months stand to escalate, exacerbating the decline in business confidence.

Most importantly, anxiety regarding the outlook for industrial relations tensions, remains intact. On this occasion, it relates to the determination of the government to restrict the increase of the growth in compensation of public sector employees as a means of controlling the growth of government spending. The latter is deemed vital to assist in achieving the government's budget deficit reduction programme over the next three years in the face of lower growth of government revenue as a result of underperformance in economic growth. In turn, deficit-reduction is essential in order to prevent the growth of public debt from running out of control in a manner which would force credit rating agencies to downgrade the rating on South African government bonds. This would risk making it more costly for the government to service the interest bill on its debt. In this context, one of the big worries for the next few months is the possibility that failure in public service wage negotiations might lead to another significant strike which could upset real economic growth prospects further.

The other big concern which could derail economic growth prospects in 2015, relates to the heightened strain on the electricity grid. There is a marked risk that an intensification of electricity outages will contribute towards further underperformance of the South African economy.

Finally, concerns remain that the curtailment of liquidity additions into the global financial system by the US Federal Reserve Board will see less investment into emerging markets and concomitant further currency depreciation. At this stage, it is unclear if an apparent dispensation towards loosening credit more readily by the central banks in Europe and Japan will help to compensate for the effects of reduced liquidity additions by the US central bank.

Hopes for improved growth: better international environment because of lower oil prices

Against these factors, however, there are some issues that might contribute positively to economic growth. Firstly, recent months have suggested that global economic growth in the US specifically, has begun responding to the massive injections of liquidity implicit in quantitative easing undertaken in the last few years. In the US, economic growth more recently has turned out to be considerably stronger than anticipated, reaching 5% on an annualised basis in the 3rd quarter. Secondly and more importantly, international oil prices have collapsed in the past two months, raising hopes of big increases in disposable income in oil importing countries. Unfortunately, the benefit of lower oil prices is not unequivocally positive across-the-board. Many oil producing economies are bound to suffer severely and it is unclear to what extent this negative impulse will neutralise the positive effects of cheaper fuel in other countries. In South Africa's case in particular, the boost to domestically manufactured exports provided by rapidly increasing growth in the rest of the sub-Saharan African region and in particular, amongst African oil exporters, could take a knock.

Furthermore, many producers of other commodities besides oil, including South Africa, could suffer a decline in exports from the fact that the fall in oil prices has been matched by declines in the prices of many other minerals. There are also significant concerns that the Eurozone debt crisis may be resurrected in the coming year as a result of the political problems in Greece, which risks having to leave the Eurozone. It is unclear whether the steps promised by the European Central Bank to help boost the Eurozone economy will be sufficient to overcome the problems caused by high levels of government debt in the region. A further slump in the Eurozone economic activity could also reverberate negatively on South Africa's export performance. Possibly the biggest concern, however, lies with the Chinese economy as it attempts to adjust its structure away from being investment-led and export-oriented, towards a more consumption-oriented dispensation. There is growing evidence of severe mal-investment in recent years and unsustainable levels of business indebtedness. The hope is that the benefits of improved global growth due to lower fuel prices will overcome the negative concerns relating to Europe, China, oil producers and exporters of other commodities.

Rand vulnerable to further depreciation

Many will also point to growing anxiety at the manner in which liquidity injections over the past year into the world economy have resulted in excessive exuberance in asset prices out of proportion to the uptake of real economic activity. Even though currently the policy of the Federal Reserve Board in the US is to keep interest rates low, the relative strength of the US economy is raising the possibility that the benign global level of interest rates might be supplanted at some stage in 2015 by a rising trend. This could upset the bull run in bonds and equities, with negative effects on real economic growth. It could result in a significant capital outflow from emerging markets. As a result, economies with large current account deficits such as South Africa could see further downward pressure on their exchange rates, especially in relation to the US Dollar.

Fortunately, the experience of the past few years has suggested that selloffs in the Rand tend to be curtailed as a result of the desire on the part of international investors to purchase the South African currency when it gets too cheap. South Africa's interest rates are seen as still relatively high and attractive for bond investors and those seeking decent interest returns from their bank deposits. From a purchasing power parity perspective, the currency is already seen as being reasonably undervalued and this is preventing its depreciation from being excessive. Nonetheless, it is quite conceivable that the currency will breach R12.00 level vis-à-vis the Dollar and return to R15.00 to the Euro over the course of 2015.

Source : Econometrix 5 /1/2015


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