SA has chance to make hay while the sun shines on global economy

Historian CW de Kiewiet’s widely quoted ’40s aphorism that SA advanced politically by catastrophe and economically by windfall is apt, yet again. This observation raises the issue whether it is indeed possible to "advance" by political catastrophe. Perhaps what he intended is that political catastrophe can lead to a national wake-up call, such as has recently been seen in Argentina, but not yet Venezuela.

Indeed, there have been times in the past when SA has come collectively to its political senses. With the current mood at a low ebb, many are hoping for just such a wake-up call. All eyes are now focused on the ANC’s elective conference in December, where the outcome appears binary.

With politics in the balance, the question is what type of economic windfall may lie out there? The short answer is quite a good one.

Over the past four decades, the global economy has averaged growth of about 3.5% per annum, albeit not without significant volatility. Still fresh in many minds is the global financial crisis of 2008, when an existential threat loomed over the whole concept of globalisation and free markets.

For several years, reverberations from the crisis sent further shocks pulsing through the global economy, particularly in Europe and emerging markets.

Now there is something of a recovery, with global GDP growth reading 3.5% in 2017 and 2018. And so far, it has been accompanied by low and even falling inflation. Before getting carried away, a reminder that 3.5% global GDP growth is only the average. Even so, there is something of a synchronicity in the current stage of the global cycle. Almost every country seems to be doing quite well.

In the US, despite some disappointing data recently, growth seems to be running at 1.5%-2%. Corporate profits are up, business capex plans are rising, jobs growth is solid and there is little sign of inflation. The US Federal Reserve (Fed) is gingerly raising interest rates from record lows, but will be very cautious not to spoil the party. Ironically, given the advanced stage of the US business cycle, it is a good thing that the Trump administration has so far failed to unite Republicans behind a tax cut and fiscal stimulus plan, because that could well lead to premature overheating.

In Europe, growth prospects look even better than the US, with 2% on the cards for 2017 and unemployment falling steadily. That 2% is not stunning, but not bad for an economy whose population is shrinking and that was in dire straits just a few years ago. Again, inflationary pressures are hard to find. The European Central Bank is making noises about tightening policy, but is likely to do so with a light touch.

In Japan too, the economy is moving ahead at a reasonable pace of 1.5%. Furthermore, nominal GDP ( including inflation), which has been the primary focus of its concerted easy monetary policy, has finally reached new highs after 20 years of declines. The jobs market is particularly buoyant, with the ratio of job offers to job applicants at a record high. The Bank of Japan remains committed to an aggressive policy of quantitative easing until inflation picks up further.

China has tightened monetary policy considerably in recent months, aimed primarily at the shadow banking sector where credit growth has been very strong for several years. Of particular concern has been the rise of off-balance sheet credit that, in recent decades, was also a prime contributor to major financial dislocations in western markets. Interest rates have risen across the curve.

Two compensating factors should help to offset the effect of tighter money. There was a sharp slowdown in government spending in 2016 that is now being reversed. Furthermore, private-sector profits have recovered after a protracted slump, leading to increased capital spending. These counterweights to monetary tightening should see the economy managing a rate of 5%-6% growth in 2017 and next.

Elsewhere in emerging markets, the outlook for growth has improved overall. India continues to run at 7%, while in the rest of Asia a steady 3.5% looks sustainable.

In Latin America, Brazil is starting to emerge from a vicious slump and prospects are brightening for Argentina, Chile, Colombia and Peru. The outlook for eastern Europe and Russia is also improving.

This "at-par" global growth is so far accompanied by continuing "sub-par" inflation. Indeed, following 2016’s oil-inspired surge, global inflation is starting to roll over in most developed and emerging economies. True, labour markets are tight in developed economies such as the US, UK and Japan in particular, but so far, this has not produced any significant surge in wage pressures. Some wage acceleration seems likely into 2018 and the Fed and the European Central Bank are likely to continue gradually withdrawing the excess liquidity made available since the global financial crisis. But experience has shown monetary tightening, if cautiously applied, does not hijack a global upswing until it reaches more advanced levels. Interest rates are still very low and would need to rise some way before reaching a level likely to act as a significant brake on economic activity.

This widespread, moderate, at-par global growth, with contained inflation, is a powerful combination that has been largely absent since the financial crisis. Of course, there are caveats and it is by no means certain this positive cocktail will play out indefinitely. At some point, the nine-year global upswing (despite its stop-start nature) should run out of steam. But the usual precursors of a global recession — particularly high inflation and interest rates — are so far absent.

The question then is this: given that something of a global economic windfall is under way, can SA capitalise on this?

There are some positives; notably a significant decline in inflation is unfolding. Food inflation, which peaked at 12% in 2016, is heading to low single digits in the second half of 2017. Headline inflation has just printed at 5.4% and is also headed lower, well inside the Reserve Bank’s band of 3%-6%. July’s release will be helped by an estimated 65c-per-litre decline in the petrol price, while core inflation, which excludes the volatile food and energy components, is running below 5% for the first time since 2013. With the national wage bill growing at around 6%, despite having slowed somewhat in recent quarters, consumer spending power is starting to gain some steam in real terms.

A less widely appreciated problem in SA is the weakness in private-sector fixed investment. Over the long term, private-sector capex provides the essential wellspring for future growth and this indicator has been in recession since the end of 2014. The private sector’s willingness to invest in new capacity is always closely linked to business confidence, which in turn is heavily influenced by the political mood. The latest readings of business confidence are depressed and it will take a much more supportive effort from government to turn this around.

With inflation decelerating and growth weak, it would appear at first blush that the Reserve Bank’s next move in interest rates will be a no-brainer. In fact, under normal circumstances, it would probably already have commenced a new rate-cutting cycle. The Bank’s monetary policy committee (MPC) has signalled that economic conditions are aligned for just such a rate cut and the forward rate market is now signalling a decline for the first time since 2013.

However, the subtext from the MPC is that it remains concerned about the outlook for the rand in an environment of political uncertainty. This was obviously not helped by recent comments by the public protector that the Constitution be changed to remove the Bank’s mandate to protect the value of the currency. Given this to be the prime raison d’etre for central banking worldwide, confidence in SA’s political situation was severely dented.

The conditions are in place for a moderate economic windfall for SA that could see the economy picking up a bit of steam throughout 2017 and into 2018.

The economic stars are reasonably aligned. We can only hope that political catastrophe doesn’t intervene.

• Bell is strategist at Old Mutual Equities and Old Mutual Investment Group.