Global environment still poses threats for South Africa

Although the global economy looks set to continue o¬n its path of gradual healing for the remainder of the year, this path is still likely to be a rocky o¬ne, with significant threats that could derail or slow the recovery and impact negatively o¬n South

Speaking at a press conference in Johannesburg o­n Tuesday, Le Roux said that the EU debt issue had probably been sufficiently addressed to prevent another full-blown crisis and double-dip recession, leaving the global economy to continue to recover slowly this year, and accelerate moderately in 2013. “We have seen slow but steady growth so far this year, and inflation is fading as a short-term concern – together these have allowed for sustained expansionary monetary policies in most developed countries. Markets have reflected this in the strong equity performance in the first quarter, with risk assets popular again, but worries about Europe and the growth outlook have returned again recently, causing renewed market volatility.”

According to Le Roux, these worries still span the US, China and the Eurozone, with the high oil price looming as a wild card. “Growth in the US looks set to remain subdued over the medium term due to the negative effects of the general fiscal tightening that must take place, no matter who is President come November. Recent US economic data has generally surprised to the upside, but growth remains o­nly moderate, unemployment is still high, and corporate profit growth is slowing. This macro uncertainty will continue to cause market volatility until we know exactly what the tightening will involve and its impact can be assessed.”

Meanwhile, the slowing Chinese economy and lowering by the Chinese government of its growth target for 2012 to 7.5% have sparked a return of hard-landing worries, Le Roux notes. The slump in the housing market is of particular concern, although the authorities have historically proved capable of managing such slowdowns. “Nevertheless, despite the o­ngoing concerns, we expect China’s growth to beat the government’s target in 2012 and accelerate moderately in 2013. Importantly, we expect more, albeit gradual, monetary easing from the People’s Bank of China this year, which will help avoid a hard landing,” he says, “but it remains a source of global uncertainty.”

In the Eurozone, although the German economy is growing, many of the peripheral countries are in deep recessions, making the situation very tenuous, points out Le Roux. Recently, worries about Spain have resurfaced, given its still-large deficit (its 2012 budget deficit target of 5.3% of GDP is likely to be missed), expectations of a contraction of 1.5% in GDP in 2012, and street demonstrations. At the same time, worries over Portugal are still lurking in the background, and the Greek elections in May hold risks around the government’s adherence to reform commitments.

The wild cards o­n the horizon are Iran, North Korea and especially the oil price, adds Le Roux. “As long as the oil price does not head significantly above its current US$125 per barrel level, which is a risk should more supply constraints develop (such as a blockade in the Strait of Hormuz by Iran), we don’t believe oil holds a serious threat to global growth around current levels.”

However, a significantly higher oil price - of nearer US$150 per barrel, for example - would represent a major threat both internationally and locally, he stresses. “More expensive oil combined with a weaker rand would exacerbate the spectre of inflation throughout the South African economy and could help push the Reserve Bank to start raising interest rates sooner than expected otherwise. This is a definite risk, as the oil price and rand exchange rate are notoriously difficult to forecast. However, our expectation is for both to remain relatively stable, inflation to peak below 7.0% shortly, and therefore for SA rates to start rising (moderately) o­nly some time in 2013.”

Le Roux believes SA growth will be around 3.0% p.a. this year, revised upward from a forecast 2.7% at the beginning of the year, largely due to the firmer 2011 base. While stronger government investment spending will provide a welcome boost, he says, growth is being held back by slower consumer spending as individuals face lower real disposable income growth and higher inflation from rising oil, electricity, rates and other administered prices.

“Although the SA economy can point to some positives, including a reasonably sound fiscal situation and strong banking and financial systems, there remain serious threats to our medium-term growth outlook, not o­nly from the uncertain global picture, but also because of unaddressed internal structural weaknesses,” cautions Le Roux. The combination of slow global growth and structural impediments at home will likely keep the growth potential anchored around 3.5% p.a., far below what is needed to meaningfully create jobs and lower unemployment.

“To conclude,” Le Roux says, “while the worst fears around the Eurozone debt crisis have faded a bit and the global economy is likely to continue its ‘getting out of the woods’ path, there are still lingering uncertainties, headwinds and risks: the uncertain global outlook over the short term, a higher oil price and its impact; the impact of US fiscal tightening; a potential flare-up in Eurozone concerns; and the risk of a fall in commodity prices, among others. As a result, investors should be prepared for more equity market and rand volatility in the months ahead. Lower returns from equities are also likely, given the strong rally in the first quarter of the year, but the environment still favours risk assets like equities, given the outlook for continuing low interest rates and reasonable corporate profit growth.”