South African Economy: Get Used to the “R” Word

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The outlook for the South African economy seems to be deteriorating by the day. The reasons are twofold: 1) the local economy is not escaping the mounting economic woes of the rest of the world; and 2) a steep price is being paid for the excesses of the past as seen by the high current account deficit, high interest rates and weak currency.

According to Gleason Torque, Brian Coulton, MD of Fitch Ratings and the agency’s head of EMEA (Europe, Middle East and Africa), said: “Given the size of the current account deficit excluding net foreign direct investment, South Africa will doubtless have to undergo a significant economic adjustment. GDP growth of 1% to 2% next year would be a good outcome in our opinion which will lead to deterioration in fiscal performance and could test support for the macroeconomic policy framework.”

The South African economy appears particularly vulnerable as is evident in the graph below illustrating the historical relationship between South Africa’s real GDP growth (lagged by three quarters) and the global services Purchasing Managers’ Index (PMI), used as a proxy for world economic growth. More gloom is undoubtedly in store for the local economy.


Source: Plexus Asset Management (based on data from various Internet sources)

On the local front, further confirmation is provided by the weak trend in South Africa’s retail sales that looks set to pull GDP growth down further, especially when one considers the two-quarter lag for GDP growth.


Source: Plexus Asset Management (based on data from I-Net Bridge)

I will not be surprised to see the South African economy join the US, UK, Japan, Hong Kong, Singapore, the Eurozone, and many other countries, and enter into a recession before too long (at least on a quarter-to-quarter basis).

The South African Reserve Bank may try to defend the rand a bit longer, but it is inevitable that interest rates should be reduced without much further delay. That is the appropriate monetary policy for an “R” outlook.


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