Standpoint: Macro Update by Kevin Lings
- 1. stanlib.com STANLIB is an authorised financial service provider. MACRO upDate The South African economy grew by a mere 0.3% in 2016. This is the lowest growth rate the country has achieved since the global financial market crisis in 2009, and also well below the average achieved since 1994 of 2.9%. It also means that income per capita continued to decline since the growth rate was below the population growth of just over 1%. under these circumstances it is very difficult to create jobs and meaningfully reduce the country’s income and wealth inequality. It is much easier to implement economic transformation strategies when growth rates are stronger. The key areas of weakness in 2016 were mining and agriculture. Together, these two sectors subtracted 0.6 percentage points from the annual growth rate. In other words, had mining and agricultural not experienced a decline in output last year, the South African economy would have grown by almost 1%. unfortunately, the electricity, water, construction and transport sectors also experienced declines in output. More positively, the broad business services sector, which includes the banking and insurance sectors, added a welcome 0.4 percentage points to the annual growth rate. This was supported by the retail sector which added a further 0.2 percentage points. Despite these positive contributions, it is fair to conclude that South Africa’s economic performance in 2016 was extremely weak and disappointing relative to expectations at the start of 2016. Furthermore, the weakness was evident across a very broad range of industries. Against this backdrop it is unsurprising that South Africa’s unemployment rate averaged 26.7% in 2016, which is the highest unemployment rate the country has recorded in almost 15 years. Furthermore, the expanded definition of unemployment, (which includes discouraged workers) rose to a very worrying average of around 36% in 2016. In particular, the unemployment rate for the youth (younger than More poSITIVeLy, THe broaD busiNess serViCes SeCToR, wHICH INCLuDeS THe baNKiNG aND iNsuraNCe SeCToRS, added a welcome 0.4 PercentaGe Points to the annual Growth rate. south africa’s growth outlook has improved, but this is largely due to short-term cyclical factors. structural reforms are needed to push the growth rate sustainably higher. SA consumer confidence Source: STANLIB, Bloomberg -15 -10 -5 0 5 10 15 20 25 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Consumer confidence By Kevin Lings staNlib Chief economist
- 2. 25), using the expanded definition, was a shocking 63%. All of this means that South Africa’s labour market has, once again, failed to gain any meaningful traction. Fundamentally, this disappointing performance reflects the lack of fixed investment spending by the private business sector, as well as sustained low business confidence aggravated by significant policy uncertainty and political turmoil. Furthermore, the high rate of unemployment contributes to much of the social tension and anguish experienced in South Africa on a daily basis, especially among the youth. and can only be resolved meaningfully through a concerted and sustained effort to improve skills development as well as encouraging private sector fixed investment spending. The low growth environment is also putting increasing strain on the national budget. This is reflected in the fact that in the 2016/2017 fiscal year tax revenue massively underperformed budget by an estimated R30bn. A breakdown of the revenue shortfall shows that the under-collection was very broad-based and includes a dramatic R15.23bn shortfall in individual tax collection, a R11.26bn under-collection of VAT and a R6.5bn lapse in the collection of customs duties. In contrast, company tax collection has been stronger than expected (with an estimated revenue over- run of R6.8bn), helped by a relatively modest initial budget increase. The under-collection of tax revenue pressurised the Minister to increase tax rates significantly. Consequently, National Treasury announced tax increases of R28bn for 2017/2018, including a substantial increase in dividend and personal income tax. More specifically, the top marginal tax rate for individuals earning more than R1.5 million was increased from 41% to 45%. There are an estimated 103 353 taxpayers that fall into this tax bracket, representing a mere 1.4% of iNCreasiNG eMployMeNt iN SouTH AFRICA HAS To Be THe number one economic obJectiVe Growth in fixed investment spending by private sector Source: STANLIB, Bloomberg %q/q, 4-quarter moving average annualised -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 2014 2015 2016 SA budget revenue over-runs/under-collection Source: STANLIB, Bloomberg Rbn, relative to the original budget and not the Medium-term budget policy statement 8.2 6.5 5.2 14.9 13.3 -5.1 20.9 41.2 29.5 13.4 -14.5 -66.4 16.6 24.8 -14.0-11.6 -30.4 -16.3 12.0 -75 -65 -55 -45 -35 -25 -15 -5 5 15 25 35 45 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 South Africa headline CPI forecast Source: STANLIB, Bloomberg %y/y 2 3 4 5 6 7 8 9 2009 2010 2011 2012 2013 2014 2015 2016 2017 STANLIB is an authorised financial service provider. stanlib.com
- 3. stanlib.comSTANLIB is an authorised financial service provider. registered taxpayers. However, these 103 353 taxpayers are projected to contribute 26.3% of total individual income tax in 2017/2018. Further changes to personal income tax included a below-inflation adjustment to the tax brackets. This meant that the Minister did not compensate the taxpayer with the negative effects of inflation (technically referred to as fiscal drag). The net result of the hike in the top marginal tax rate as well as the lack of adjustment to the tax brackets means that personal income taxes are expected to contribute an additional R16.5bn to total tax revenue. The international credit rating agencies welcomed the tone of the national budget, especially the Minister of Finance’s intention to reduce the fiscal deficit as well as contain government debt, but they continue to flag the disappointing growth trajectory. Fortunately, three key factors are likely to combine to lift South Africa’s growth rate to between 1.0% and 1.5% in 2017. Firstly, improved rainfall across the central and northern parts of the country during the past six months is expected to boost agricultural production, especially maize production after a severe drought in 2015/2016. This turnaround in the fortunes of the agricultural sector has the potential to boost South Africa’s economic growth rate by as much as 0.5 percentage points. Secondly, industrial commodity prices have moved noticeably higher over the past year. The basket of industrial commodity prices monitored monthly by the International Monetary Fund has risen by a very impressive 31.5% in dollars in the year ending February 2017. This uplift in commodity prices has boosted South Africa’s export performance, which rose by almost 37% year-on-year in January 2017. This is the best export performance South Africa has achieved since 2011. Consequently, South Africa has been able to move from perpetual monthly trade deficits into more regular trade surpluses. This should help to lift economic growth, while at the same time providing some support for the rand exchange rate. Thirdly, South Africa’s consumer inflation rate appears to have peaked at 6.7% year-on-year in December 2016, and is expected to moderate to an average of around 5.6% in 2017. This slowdown in inflation is largely based on a moderation in food inflation, supported by the much improved agricultural season. Agricultural food inflation has already slowed dramatically in recent months. Importantly, the slowdown in the rate of inflation should provide some relief for the South Africa real GDP growth year-on-year Source: STANLIB, Bloomberg %y/y -2,0 0,0 2,0 4,0 6,0 8,0 05 06 07 08 09 10 11 12 13 14 15 16 Importantly, National Treasury warned that taxes are likely to rise further in 2018/2019; possibly by a further R15 billion. SA business confidence (BER) Source: STANLIB, Bloomberg Index 15 25 35 45 55 65 75 85 95 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
- 4. stanlib.comSTANLIB is an authorised financial service provider. household sector, boosting income and spending in real terms. Although the improved outlook for inflation suggests that the South African Reserve Bank could cut rates in late 2017, the scope for the Bank to cut interest rates will be significantly impacted by further upward adjustment of interest rates in the United States and South Africa’s credit rating remaining at risk of being revised lower. The Federal Reserve is expected to hike rates three times in 2017, having increased rates by 25bps in December 2016. Consequently, we currently expect local interest rates to remain unchanged throughout 2017. Risks to SA growth The more favourable growth outlook for 2017 is not without risk. These risks include still low consumer and business confidence which will take time to revive, ongoing cost-cutting by many corporates which could start to include more retrenchments, and a steep decline in private sector fixed investment activity. Nevertheless, South Africa’s economic growth is expected to improve somewhat in 2017, albeit due to short-term cyclical factors. Longer-term, given the current state of government finances, including higher levels of debt and a weakening tax base, as well as the increasing demands for financial support from the state-owned enterprises, it seems clear that the public sector is unable to provide additional economic stimulus in the form of government spending. Instead, they will need to focus on maintaining fiscal discipline while pursuing targeted fiscal programmes. This implies that South Africa’s economic policy officials need to find a way to lift business confidence and encourage the private sector to play a bigger role in growing the economy. Realistically, this is most likely to be achieved through an implementation of economic infrastructure development through the increasing use of private/ public partnerships. This will require the full backing of cabinet and will have to be supported by sound and consistent economic policies. Ultimately, the current political turmoil in South Africa is likely to proVE decisive in how the balance of risks to the economy unfold in 2017, especially as the ANC starts to focus on their elective conference in December 2017.