Global Economy – implications for SA companies: 5 February 2020

Key points

1. Trading goods across borders remains tense – The global volume of merchandise trade went in reverse in 2019: we expect this trend to continue in 2020 and for trade tensions in the global goods market to persist. Globalisation is likely to give way to ‘slowbalisation’, i.e. continued integration of the global economy via trade, financial and other flows, albeit at a significantly slower pace. A switch from globalisation to slowbalisation is bad news for South African exporters of, for example, wine fruit producers, platinum mines and vehicle manufacturers. It is an unwelcome development that will require export-oriented South African companies to consider various scenarios for the world economy and global trade patterns in the short to medium term. Some 69.4% of South African CEOs are somewhat or extremely concerned about trade conflicts.
2. World services trade increasing to R100 trillion – We expect the total value of services exported to increase from R78 billion (3.5% of global GDP) in 2018 to R100 trillion by 2020. The US and UK are likely to remain the first and second largest exporters of services in the world. President Cyril Ramaphosa said in his first State of the Nation Address (SONA) in 2019 that the government will have a focus on exporting services like, for example, business process outsourcing: PwC’s calculations show that business services are amongst the most impactful industries in South Africa based on the growth and jobs that can be created by investment in the sector.
3. Global economy growing at a modest pace – We expect the global economy to expand at a rate of 3.5% in 2020 – i.e. below the post-2000 average of 3.8% p.a. We expect all major economies to grow, buoyed in part by accommodative financial conditions. The South African economy has for some years deviated from global growth trends and followed its own trajectory. As such, a shift in global growth is not a direct signal as to the fate of South African business. However, it is the slowdown in growth in key trade and investment partners – the US, UK, euro zone and China – that will adversely impact individual companies. Some 38.9% of South African CEOs surveyed by PwC want to enter a new market in the next 12 months to drive revenue growth.
4. US oil production hitting record levels – Global renewable energy and nuclear consumption will make up more than 20% of global energy consumption this year, which is the highest it has ever been. However, oil will continue as the most preferred source of energy in 2020 for the world economy. The US may surpass the 13 million barrels per day production threshold in 2020 compared to just 5.5 million barrels per day some 10 years ago. The US is not amongst South Africa’s top suppliers of petroleum products, so these production numbers are not of direct interest to domestic fuel consumption. Where it is important is the impact of US production on oil prices: the ramp-up in production has cushioned prices in recent years. South Africa is a price-taker in the oil market that makes it vulnerable to external factor. Some 63.9% of South African CEOs surveyed by PwC are somewhat or extremely concerned about volatile energy costs.
5. BRICS partner India rising in global economic rankings - India overtook the UK and France in 2020 to become the fifth largest economy in the world. This is an ongoing process with India likely to overtake Germany before 2025 and Japan before 2030 to become the world’s largest economy behind China and the US. India is South Africa’s closest (from a geographic perspective) BRICS partner. A healthy Indian economy could be good for South Africa from a trade and investment perspective. South African President Cyril Ramaphosa visited India in January 2019 and signed a Three-Year Strategic Programme with Indian Prime Minister Narendra Modi aimed at deepening bilateral engagement between India and South Africa and ensuring that a result-orientated partnership benefits the people of both countries.

Click here to read more...