ECONOMIC GROWTH FOR 2016 – NEWS REPORT ON ECONOMIC OUTLOOK

Publication Date: 11/01/2016

Economics has gained a reputation of being a gloomy subject these past few years, and economists offering views on the outlook for South Africa are unlikely to shed that dark cloud in 2016. The global environment isn’t helping either. The International Monetary Fund (IMF) may estimate that the global economy will grow by 3.5%, the strongest in five years, but it is clear that the nature of that economic growth has changed dramatically. Compared to 2013, when advanced economies drove barely 15% of global growth, these economies are expected to contribute nearly double that in 2016, while China’s outsized influence has wanted somewhat. This global combination impacts us in South Africa in two ways, neither of which is very supportive for the 2016 outlook.

The first impact is through the channel of commodities. Simply put, countries like China use a far larger proportion of commodities in each unit of their output than other countries like the US, and so China’s slowing economy is associated with a slowing of demand for many of the raw materials that are at the core of South Africa’s exports. This weaker demand growth is one important factor contributing to the very sharp decline in global commodity prices witnessed since the second half of 2014, and our sense is that commodity prices are likely to remain so throughout 2016. That is not good news for South Africa’s struggling mining sector and the parts of the manufacturing and service sectors that work in the same areas. The second global channel impacting South Africa in 2016 is likely to be a financial one. Since the global financial crisis first hit, the broad thrust of global monetary policy has been one of very low risk-free rates. That has not only encouraged more investment in the private sector in advanced economies, but also sent investment funds from low-yielding advanced economies into higher-yielding emerging markets. As the US Federal Reserve begins to raise the US policy rate, one likely impact will be for some of that money to flow back to the US. With that comes more rand uncertainty and higher funding costs for South Africa.

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