Maarten Ackerman, Chief Economist at Citadel
While interest rates and inflation are slowly coming down in South Africa (SA) and around the globe, to the relief of consumers, a combination of forces is likely to keep economic growth below capacity for at least the next two to three years, according to Citadel Chief Economist, Maarten Ackerman.
With the South African Reserve Bank (SARB) cutting interest rates by a moderate 25 basis points yesterday in line with widespread expectations, and if inflation remains stable for the time being, South Africans can expect more rate cuts in early 2025, says Ackerman.
He explains that inflation is at a low 2.8% due to a 20% decline in the fuel price, bolstered by the strengthening of the rand since the national elections, but that inflation is expected to rise again soon to levels within the SARB’s inflation target of 3% and 6%.
Looking at the global landscape, the economist foresees weak growth for Europe, the United Kingdom (UK) and Japan and a slight slowdown in the US from current healthy levels, while some emerging markets may see moderately higher growth in the medium term.
Developed markets will struggle but won’t go under
Turning to the US election results, economists foresee President-elect Donald Trump’s economic policies having an inflationary and opposite-to-intended effect on the US economy.
“Out of the three major policies that Trump wants to implement, namely trade protectionism, immigration crackdowns and fiscal reform, two of the three – trade tariffs and immigration – will create headwinds for free trade and an affordable domestic labour market. In short, both of these moves are inflationary in nature and negative for economic growth, which implies that interest rates in the US might not decline as quickly as had been hoped.”
In terms of the fiscal stimulus Trump is seeking, Ackerman cautions that it will be challenging to find the revenue to make it work, especially considering the Republicans want to cut taxes further for companies and higher earners. “The US economy is probably going to experience some headwinds in terms of growth, some sticky inflation, and as a result of that, interest rates are likely to decrease slower than expected. For the rest of the world, this could trigger tit-for-tat trade tariffs, which adds to our house view that the world is in for a period of growth slowdown on the back of struggling global trade. The net exporters of the world will be battling these next few years. In short, we can expect a sober global growth environment going forward, sticky inflation and less interest rate cuts than initially expected.”
Looking at global growth over the next two to three years, Ackerman believes that the US will slow down in an orderly fashion, getting closer to trend growth of 2%. The rest of the developed markets are still battling to find their feet. “If the US gets away with a soft landing and China gets its growth engine going again, the rest of the developed markets should be able to pick up.”
In Ackerman’s view, “things are better now than they were a year ago (for the developed markets) when a global recession was still hotly debated as global economies continued to battle inflation”. The US, a consumer-driven economy, was still bolstered by stable consumer confidence. “Given the strength of the US labour market, we may see the US avoiding a recession altogether.”
Even though credit card debt was climbing, and job security was unlikely to maintain its current highs, US net wealth and employment rates were at their highest levels in history. Given the current consumer sentiment, Ackerman maintains that the US will slow down, but to capacity growth, which is around 2% per annum. “And given the Federal Reserve’s (Fed’s) easing of monetary policy, the US consumer may get through this patch without any significant damage.”
Looking at the overall global picture, Ackerman comments: “Over the last two decades, global growth was around 3.5%, but this number will likely find a footing at around 2% to 2.5% over the next three years. The US and China will contribute less to global growth, and emerging markets, especially India, will contribute more.”
Exporter nations are in for a tough few years
Economic prospects are more negative for other developed markets that are not consumer-driven economies, but rather rely on exports for revenue. “Markets that rely mainly on exports will face headwinds due to geopolitical upheaval and supply chain disruptions around the world,” says Ackerman.
He points out: “An important theme emerging this year is the divergence in economic growth of the major developed markets. While the US has continued to grow steadily, Europe, the UK and Japan – which have been hurt by deglobalisation – entered recessionary territory, with barely any growth worth mentioning. These countries were first to start normalising policy and cutting rates – weeks before the US – in an attempt to get their economies going.”
Ackerman explains that four factors typically impact economic growth: consumer spending, fixed asset investment through public and private investment, government spending and economic management, and net trade, which is imports minus exports. The US and SA economies are consumer-driven, with consumer spending being the biggest contributor to economic growth at 70% and 66%, respectively. China, in turn, has fixed asset investment making up about 45% of its economy. Despite a government push, Chinese consumer spending only contributes around 40% to growth. Germany, Japan and China are mainly net exporters, which have been battered by global trade wars, deglobalisation and global slowdown. Following the pandemic, the annual growth in global trade decreased to just 2%, a sharp decline from the steady 8% it maintained throughout the 2000s.
Critically, exports and manufacturing took a beating in the European Union (EU). Italy’s manufacturing sector never recovered from the pandemic, while France and Germany are both down 10%, with the pivotal German automotive manufacturing industry flatlining since 2020, causing major knock-on effects in the EU. High production costs, high energy costs due to the conflict in Ukraine, and a slow response to China’s 70% global electric vehicle (EV) manufacturing dominance, all contributed. Ackerman explains that “To make matters worse, Europe imports large numbers of EVs from China, because of strict emissions targets and the move away from combustion engines. Now tariff protectionism is emerging. This dynamic is adding to both Europe and China’s slow-down.”
The way forward for South Africa
While real Gross Domestic Product (GDP) growth is now estimated to be only 1.1%, medium-term growth is forecast to average 1.8% over the next three years. To achieve higher inclusive growth, Finance Minister, Enoch Godongwana last month said the country needs to focus on improving macroeconomic stability, structural reforms, growth-enhancing infrastructure and state capability. Looking at Godongwana’s current budget, Ackerman expects real economic growth above capacity to be about three to five years away.
Some bright spots for the SA economy include the well-received formation of a Government of National Unity (GNU), improved energy security, lowering inflation, and the strong recent performance of local equities, bonds and the rand, which boosted the country into the top three positions among its emerging market peer group.
“The country is now attempting to reverse 15 years of economic decline through a combination of policy implementation, port privatisation, improved mineral beneficiation and reformed trade policy. High interest rates and record-high unemployment rates must however also be reversed, to boost SA’s consumer-based economy,” says Ackerman.
Conclusion: Cautious optimism
“We are more certain that inflation is under control, which is supportive of further interest rate cuts. If all goes well, we could engineer a soft landing, which will then result in capacity growth for the world economy over the next three or four years. While there are headwinds for some asset classes, there are positive tailwinds for others, creating investment opportunities for us here in SA,” he concludes.
ENDS
