Slowdown in economic growth

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In its January 2016 update to the World Economic Outlook, the International Monetary Fund (IMF) highlights three main factors that influence the global outlook:

  • The slowdown of China’s economy.
  • Lower energy and commodity prices.

Tighter US monetary policy, leading to higher US interest rates in coming months. Trade with China is slowing down at a faster rate than expected in October 2015. Markets are worried about the future performance of the Chinese economy.

The demand for commodities has decreased because of the Chinese slowdown and slack global commodity demand, trade and manufacturing.

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Emerging markets
Imports and exports into and from emerging markets have declined sharply as lower commodity prices have pushed some of these countries into economic distress.

The IMF revised its global economic growth forecast downward by 0,2 percentage points for 2016 and 2017 from its October 2015 estimate. Global economic growth is projected at 3,4% in 2016, improving to 3,6% in 2017.

In emerging markets, growth is expected to increase from its lowest value of 4% in 2015 to 4,3% and 4,7% in 2016 and 2017 respectively.

China’s economic growth is forecast at 6,3% in 2016 and 6% in 2017. In Latin America, Brazil’s recession is the main reason for the IMF’s estimate of a contraction of the economy.

Slightly higher growth is expected for the Middle East, with lower oil prices and political uncertainty putting downward pressure on expectations.

Russia will probably remain in recession in 2016. Other emerging European countries are affected by Russia’s situation. Growth in these countries will improve slightly in 2016 and may accelerate in 2017.

In sub-Saharan Africa, the low commodity prices will limit growth to lower figures. Higher borrowing costs are a problem for the region’s largest economies, Nigeria, South Africa and Angola.

The IMF is fairly negative about South Africa’s growth prospects, expecting a decrease from an estimated 1,3% in 2015 to 0,7% in 2016 and then a slight recovery to 1,8% in 2017. These are 0,6 and 0,3 percentage points lower than the October 2015 forecast.

In its November Monetary Policy Review, the Reserve Bank cites the lower commodity prices and continuing energy crisis and drought as having had a negative impact on the country’s growth.

The SA economy has also suffered considerably from government’s erratic and unpredictable financial policy. The market has punished this erratic behaviour, putting major downward pressure on the rand. The weak rand will increase inflation, particularly imported inflation. This will force the Reserve Bank to increase rates.

The following are the key downside risks for the expected economic growth:

  • A sharper downturn in China could spill over into other markets with less trade, lower commodity prices and a general loss of confidence and increased currency volatility.
  • Further dollar appreciation and tighter global financing conditions. In South Africa’s case, this is exacerbated by rand weakness as the global financial community’s confidence in the SA economy decreases.
  • A sudden rise in global risk aversion may again result in a flight to quality, leading to further deterioration and financial strains in emerging markets. As South Africa’s economy is already stressed, even a small shock may cause this.
  • An increase in tension in various regions can disrupt global trade, financial and tourism flows. 

Implications for agriculture
The IMF’s growth prediction for South Africa probably does not fully take into account the effect of the drought, especially on downstream and upstream industries.

Low economic growth equals low demand growth. Local food demand will thus grow slowly. However, the shift in income towards the lower income groups continues and will result in positive food demand growth.

The weaker rand has already had an impact on inflation. This trend will continue, forcing the Reserve Bank to increase interest rates. An increase of 1 percentage point is expected.

The weak rand is a boon to fruit and other agricultural exporters. But higher prices on export markets may in some cases not fully absorb the effect of higher packaging and freight costs.

Higher input prices and interest rates will further limit farmers’ profitability. Only productive capital expenditure should be undertaken until there is a clearer picture of the direction the local economy is taking.

Dr Koos Coetzee is an agricultural economist at the MPO. All opinions expressed are his own and do not reflect MPO policy.