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Reality biting

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Reality biting

9th October 2015

By: Terence Creamer
Creamer Media Editor

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Three international reports released over the past couple of weeks have a material bearing on the South African economy and are, thus, worth highlighting.

First, the International Monetary Fund (IMF) published a study that assessed the implications of the current weak outlook for commodity prices on commodity-exporting countries. It suggested that the recent declines in commodity prices could shave off one percentage point yearly from the growth rate of commodity exporters over the period 2015 to 2017, compared with 2012 to 2014.

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The report also argued that the slowdown was not only cyclical, but also structural in nature. “On average, some two-thirds of the decline in output growth in commodity exporters during a commodity price downswing tends to be attributable to the cyclical component of growth. The remaining one-third tends to be attributable to the structural component, reflecting reduced investment and potential output.”

This has serious implications for South Africa, where the economy is still heavily aligned to the fortunes, or otherwise, of commodity markets. As the IMF notes: “The finding that potential growth declines during commodity price downswings has an important policy implication. It makes the case that the policy response to the weaker outlook should go beyond aggregate demand measures and include targeted structural reforms to alleviate the binding supply-side bottlenecks and boost productivity growth in commodity-exporting economies.”

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The second report, released by the World Trade Organisation (WTO), indicates that lower commodity and energy prices are also likely to have an effect on the global trade performance.

The WTO economists lowered their forecast for world trade growth in 2015 to 2.8%, from the 3.3%, and reduced their estimate for 2016 to 3.9%, from 4.0%. The revisions reflected falling import demand in China, Brazil and other emerging economies, weaker prices for oil and other primary commodities and significant exchange rate fluctuations.

“If current projections are realised, 2015 will mark the fourth consecutive year in which annual trade growth has fallen below 3% and the fourth year where trade has grown at roughly the same rate as world gross domestic product, rather than twice as fast, as was the case in the 1990s and early 2000s.”

The third report was the World Economic Forum’s (WEF’s) 2015 Global Competitiveness Index, which saw South Africa rise seven places from 56 to 49, out of 140 countries.

However, the WEF assessment should argu- ably be read against the backdrop of the broad-based declines referred to in the two earlier reports. In other words, South Africa’s improvement could be more relative than absolute. Nevertheless, it represented a welcome reversal in what had been a four-year downward trend.

A downgrade in the growth performance for the domestic economy had all but been factored with for 2015 and 2016. But that should not impede efforts to deal with the “binding bottlenecks” by improving educational outcomes, building growth-facilitating and employment-generating economic and social infrastructure, diligently pursuing economic and trade diversification and raising productivity levels.

It would also be fair to say that progress would be markedly accelerated if these endeavours could be pursued in an atmosphere of clean governance and reduced crime – two nasty elements that continue to erode investor confidence and sap entrepreneurial energy.

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