NOMPU SIZIBA: What can we expect to happen in key economies this year? Well, to share her thoughts on some of them I’m joined on the line by Sanisha Packirisamy, an economist at Momentum Investments.
Sanisha, the US surprised with job-creation numbers of 300 000 in December. Is that a possible peak, with the possibility of slower job growth going forward – especially as that economy is said to be near full employment? And what is your broader economic outlook for that economy?
SANISHA PACKIRISAMY: Well, Nompu, we do expect that employment creation will start to slow, simply because we are entering a tighter labour market. But we believe that there is still a little room for unemployment to fall even further over the course of this year. We actually have quite a positive outlook for the US economy; we think that growth could be around 2.4% on average for 2019. That is a bit slower than we saw over the course of 2018, where growth was around 2.9%, but I think a lot of the drivers for growth are still in place. So the consumers are still facing high levels of confidence, good net wealth positions, a further fall-off in unemployment, and real wage gains that are still supportive for growth.
NOMPU SIZIBA: Some analysts are agitating for China to unleash one of its mammoth stimulus programmes, similar to what we saw following the global financial crisis. But China is on record as saying that it’s not going to go there. With worries that it’s slowing down, what do you think China will do, given that growth is such a priority for that country?
SANISHA PACKIRISAMY: In fact, China has already been implementing a number of policies to counter the impact of the negative trade policies that have come through from the US economy. So what we’ve seen so far is that they have extended the local government bond issuance, which means that we can get more infrastructure spend. They’ve also cut a number of tax rates, which means it’s a bit easier for consumers and businesses to spend in the economy. So at the margin they have been easing conditions. We’ve also seen a further cut in the reserve requirement ratio.
So, going forward, if they had to do a much bigger stimulus package, that would imply that growth would have to fall substantially below 6% in order for them to make a much bigger move. At the moment we think that there are enough policy tools in the fiscal space, in the monetary space, to slowly manoeuvre on in order to prop up growth and keep growth above that critical 6% level.
NOMPU SIZIBA: The US and Chinese guys are currently having face-to-face discussions around the trade tensions. What are your expectations? And, if things do go belly-up, what does it mean for commodity-exporting countries like South Africa?
SANISHA PACKIRISAMY: If we do get an increase in those tariffs – from 10% to 25% – it would shave off around 0.3, 0.4% from global growth as a whole. Unfortunately South Africa is a small, open economy, which means that we are very reliant on external trade. In an environment where global demand weakens, that would be a net negative for the South African economy. We don’t think that the impact on inflation is going to be too massive. There are some offsetting factors in place that will prevent a run-up in inflation.
NOMPU SIZIBA: What are your views on the eurozone, which seems to be slowing down? It also looks as though the European Central Bank doesn’t have a huge appetite to tighten its monetary policy stance any time soon.
SANISHA PACKIRISAMY: Unfortunately the eurozone is not as favourable an outlook as that which we’ve seen in the US. In the eurozone it’s looking incrementally like growth is likely to be lower in 2019 than it was in 2018. Even though we don’t have the fourth-quarter growth numbers for the eurozone for 2018, it seems that we had growth of around 1.9%. We are forecasting growth closer to around 1.5% for the eurozone for this year, and that’s really on the back of continued political risk factors and, of course, the global trade tensions that are playing out. Though we could potentially have another election in Spain and in Italy, for example, we know that the political situation has continued in Germany. In addition to that, there is of course Brexit playing out for the European Union as a whole, and these trade tensions that are now escalating with the US could shave off another couple of basis points of growth for the eurozone for this year.
NOMPU SIZIBA: You touch on the whole Brexit situation. A hard Brexit looks almost inevitable, and it keeps one asking whether this has also been baked into market numbers. Or could we see things get far worse for the UK in terms of a weaker pound, disinvestment, weaker trade relations and so on?
SANISHA PACKIRISAMY: I think you are right in saying that some of it has already been priced in. We have seen business intentions to invest quite close to all-time lows, as businesses are not really responding by putting through further fixed investment in fear of what might come out of the Brexit scenario – and the growth scenario, in fact.
For the moment we do believe that there are a number of options on the table, and it’s quite difficult to face which one will play out. And, as we grow closer to the end of March, which is essentially the date at which the UK is expected to leave the European Union, more of these options are coming to the table. So I think there will be a lot noise around it. Our estimation is that we do actually see the UK parliament signing off on the Brexit deal, even to a second or third round. That might mean that the EU would have to compromise on a number of factors in order to get the UK parliament to sign that deal through.
If we are wrong and that does not happen, we could see an extension of that date at which the UK is expected to leave the European Union, and that extended date would then imply that a second referendum will have to be held. If another referendum is held, and the popular choice is for Britain to remain within the European Union, there could in fact be an upside surprise – an upside surprise for growth, and an upside surprise for sterling.
NOMPU SIZIBA: In the meantime, of course, the UK will have lost a lot of investment from the financial sector, where some companies have already shifted their headquarters and so on to Europe.
SANISHA PACKIRISAMY: Definitely. We are already seeing disinvestment specifically in the financial services sector. And of course, we have seen this coming though the domestic economy, where consumer confidence and business confidence have remained close to all-time lows, where they are waiting for the outcome of Brexit and are not willing to spend or invest in an environment where uncertainty remains.
NOMPU SIZIBA: So what’s the outlook for emerging economies, especially if there continues to be concern about the fragility of developed equity markets for this year? This might in turn see capital flight away from emerging markets, which might adversely impact those economies.
SANISHA PACKIRISAMY: I think there are a number of fragilities that are facing emerging markets this time around, so we expect growth to soften slightly relative to what we saw in 2018 for the emerging market composite as a whole. Firstly, the ongoing normalisation in monetary policy is well under way in the United States and is coming to the fore for the eurozone. So this means that financial conditions are becoming a bit more onerous, and it’s a bit more difficult for emerging markets in that kind of environment.
We also have the ebbs and flows of geopolitical risk factors that come into play. We think that those economies that have a high level of external debt – that are held in either dollar-denominated terms, or euro-denominated terms – those are the markets that will struggle a bit more going into 2019. There are also a number of elections that are likely to play out in emerging markets in a number of countries, though we could find idiosyncratic once-off factors in a number of emerging markets that are facing domestic political risk.
NOMPU SIZIBA: Before we specifically look at South Africa and your expectations around the economy, what’s your view on the oil price? That has been very nice for us, thank you very much, in terms of South Africa as a net importer of crude oil. And of course we’ve seen those local domestic petrol prices – fuel prices in general – come down. But what is your outlook for the demand-supply picture and ultimately the price?
SANISHA PACKIRISAMY: We’ve had a very nice windfall, as you say, from the oil price – something that’s going to help the domestic consumer, and it will also help headline inflation. But the reality is that there is going to be a of a shortage in oil supplies in the next couple of months. We are expecting the oil price to drift a bit higher going into the rest of 2019. It’s really only by the end of 2019, when US shale production can come online – there are some constraints to that coming on a lot sooner – which means that oil prices are likely to pick up going into the end of the year.
NOMPU SIZIBA: The rand serves as a good barometer as to how the rest of the world sees us, and we’ve seen some decent strength in the local currency in the number of past sessions. Is this just a product of what’s happening with other major currencies, or are there South Africa-specific reasons for the strength that we’ve been seeing? What is the broader outlook for the economy, and what threats and opportunities will the national election pose?
SANISHA PACKIRISAMY: The rand is a very high beta player, which means that when we are in a period of emerging market risk-on, the rand tends to rally quite strongly. And when we are in a period where there is risk-off sentiment for emerging markets, and investors shy away from emerging market investment, the rand tends to get hit harder than the other currencies.
We also have of course our own idiosyncratic factors at play. I think policy uncertainty has not been helping the rand. Over the course of 2018 the rand was the fifth-worst-performing currency. The elections are coming up, and we have seen in previous elections in a number of other emerging market countries that the currencies tend to strengthen in the run-up to an election. The outcome will determine whether the rand will strengthen further or move in the other direction.
Again, coming up for the election in South Africa, the percentage by which the ruling party actually wins will really be the mandate for the president to run with structural reform or not.
NOMPU SIZIBA: Just in terms of the policy uncertainty that you’ve touched on, of course the land issue was a big theme last year. How concerned is the house of Momentum Investments around this particular issue, or do you think, as the president has been saying, that this is going to be a policy that will not disturb economic growth?
SANISHA PACKIRISAMY: We’ve been trying to listen very closely to what the ANC as the ruling party has been suggesting around the outcome for reform – exactly as you say – to be a more conservative approach, because this is a very contentious issue. There has been a lot of noise around land reform and some very dire scenarios have been made out. We are not of the opinion that one of those dire scenarios will play out. We do think that there will be some element of land reform. We do believe that the element needs to be carried out in a country where inequality is as high as it is. But we think it will be done in a very progressive manner that does not harm growth or agricultural production supply and security of food in any meaningful way, as the ANC has suggested.
NOMPU SIZIBA: Right. And then in terms of last year’s growth, of course we haven’t had the fourth quarter number come out yet. But, based on your estimates, where do you think we ended up in terms of economic growth and what’s your expectation for us number-wise for 2019?
SANISHA PACKIRISAMY: Well, Nompu, we were all very optimistic on what growth would deliver in 2019. I think it was around the end of the first quarter of 2018, when the consensus for South African growth for the full year for 2018 was sitting around 2%. Going into December those forecasts had drifted lower to around 0.7%. We do believe that there will be a slight increase in growth for 2019. We are looking for growth around the order of 1.5%. What we are concerned about is, of course, persistent electricity outages. If we map what happened in the previous electricity outages to what could potentially happen this year, that could shave off a couple of basis points, which could mean that growth could be looking closer to 1% than 1.5%.
NOMPU SIZIBA: And one last theme – we know that the national minimum wage law came into effect at the beginning of the year, and there has been talk that it’s going to really be problematic for small businesses in particular. Any concerns that we might see some job losses in that regard?
SANISHA PACKIRISAMY: We are not very optimistic that we’ll see major job increases for the year. I think small businesses also face the same problems with bargaining rounds, where they have to adapt to higher wage increases, let alone the actual job numbers that come through. So in that respect I think there are some labour rigidities that the country is facing that still need to be sorted out. So it wouldn’t necessarily just be the minimum wage that is a problem.
I think with regard to the bargaining rounds that come through throughout the year, it’s very difficult for small businesses to pay the same wage increases that large firms do. They just don’t have the same type of support and ability to add costs in other areas. I do think we need to increase labour-market flexibility. It has been one of the suggestions put forward by the International Monetary Fund as a proposal to propel those to a higher trajectory over time.
NOMPU SIZIBA: Thanks very much for your time, Sanisha.