The Policy Uncertainty Index (PUI), as published by the North West University (NWU) Business School, increased to 53.6 index points in the fourth quarter of 2019, from 53.1 index points in the third quarter.
The business school points out that “negative factors outweighed positive ones” in the fourth quarter, leading to policy uncertainty remaining “strongly elevated” in negative territory during this period.
Global financial markets, meanwhile, finished last year “on a high note” as the immediate risks of a US and China trade conflict, and uncertainties around Brexit, receded.
Although the world economy continued to show positive growth, NWU Business School Professor Raymond Parsons warns that the geopolitical environment in some areas “had become increasingly risky and uncertain, especially for business investment”.
Domestically, however, inflation decreased to within the target range of between 3% and 6% and the rand strengthened towards the end of the year, with the prospect of lower petrol prices.
Additionally, retail sales appear to have been buoyant in the last two months of the year.
However, the PUI shows that adverse factors in South Africa, which kept policy uncertainty in negative territory during the fourth quarter, included, in particular, weak mining and manufacturing data, the implementation of load-shedding by State-owned power utility Eskom, vulnerable public finances, crime and violence, political factionalism and the possibility of ratings agency Moody’s downgrading South Africa’s investment-grade rating this year.
Additionally, the perception that the National Treasury’s growth plan may not be successfully implemented also played a role, and business and consumer confidence remained at low levels.
These high levels of policy uncertainty are reversible, Parsons notes, saying that the latest PUI again confirms that the most important contribution that government can make now remains to minimise the uncertainty created by its policies and actions.
“If policy uncertainty is to be lessened, concrete signals about South Africa’s future economic direction need to emerge from both the State of the Nation Address and the Budget speech next month,” Parsons avers.
“There needs to be urgency and resolve in stabilising the policy outlook.”
GLOBAL ECONOMIC OUTLOOK
According to the PUI, by the fourth quarter of last year, the US economy had been growing for about 129 months, the longest run since records began in 1854. Average gross domestic product (GDP) growth during this expansion has been 2.3%, and is lower than the 3.6% seen in America's three previous expansions.
The NWU Business School warns that history suggests there may be a recession soon, but says that despite mixed economic signals, the US economy currently remains the “locomotive” of world economic activity.
“US consumer spending is the main pillar there, and a recent authoritative survey puts the chance of a US recession this year at only 20%. Additionally, although the Chinese economy was expected to grow at about 6% in 2019, in line with expectations, it will still be the country’s weakest growth in nearly three decades.
“The US-China relationship appears broken, and even the latest truce may not necessarily repair it. Trust between the two countries is minimal,” the business school comments, adding that “it seems that both sides will work to make themselves less vulnerable to the other by reducing the economic commitments that bind them together, irrespective of collateral damage to any other countries”.
More broadly, global political trends are generally putting the multilateral trading system under great strain, as is reflected in the “increasing dysfunctionality” of the World Trade Organisation, which is facing its deepest crisis since its creation, according to European Trade Commissioner Phil Hogan.
He adds that if the rules governing international trade can no longer be enforced, “we’d have the law of the jungle”.
Hogan suggests that an effective rules-based international trading system, especially, remains in the interest of small open economies like South Africa.
The major global financial markets nonetheless finished 2019 on a high note as the immediate risks of a US-China trade conflict and uncertainties around Brexit receded.
Regarding Brexit, the business school says it should be remembered that, although Britain will formally leave the European Union on January 31, there remains a year of transition and negotiation which, if not successfully completed, may bring new uncertainties by the end of 2020.
Although South Africa’s trade interests are protected in the post-Brexit phase, it will remain necessary to carefully evaluate the trade implications of the Brexit transition process as it unfolds to evaluate any new risks, as well as opportunities, the PUI notes.
On the overall international economic outlook, Parsons notes in the index that the broad consensus is that, although the world economy will continue to show positive growth, the geopolitical environment has become increasingly risky and uncertain, especially in the light of the latest tensions in the Middle East.
SOUTH AFRICAN ECONOMY
Negative factors outweighed positive ones in shaping the level of policy uncertainty in the fourth quarter of 2019 and kept it well in negative territory in the past quarter. Although the former was dominant, the NWU Business School states that it was not all bad news over that period.
“The good news included the decline of inflation to well within the target range of 3% to 6%, the marked strengthening of the rand towards year-end, which promised lower petrol prices, as well as the possibility of a cut in interest rates”.
Additionally, the PUI highlights the welcome summer rains over several regions of South Africa, which offers a potential higher agriculture output in 2020.
South Africa's victory in the Rugby World Cup in November also made a positive contribution to lifting the national mood in the fourth quarter of last year, while the second Presidential investment conference in November was also seen as a successful one in generating further investment commitments.
On the negative side, however, the poor GDP growth of -0.6% in the third quarter of 2019 was followed in the fourth quarter 2019 by very weak manufacturing and mining data, meagre new-vehicle sales, as well as continued low business and consumer confidence.
“The South African Airways (SAA) saga persisted, [and] then came the shock to the economy and business of renewed Eskom load-shedding in December, which was the single most important factor causing the spike in policy uncertainty in [the fourth quarter],” Parsons notes, adding that the shadow cast over economic prospects by further power blackouts then inevitably led to economic growth forecasts being reduced all round.
“These developments, therefore, suggested that South Africa would struggle to even reach the previously low growth forecasts of 0.5% in 2019, and which may eventually be found to have sunk further.”
Negative economic trends in the fourth quarter then inevitably presaged lower growth expectations for 2020. The World Bank has now cut its growth forecast for this year to 0.9%, the South African Reserve Bank to 1.2%, and Nedbank to 0.7%.
“Certainly, South Africa can now no longer even take the possibility of a 1% growth rate for granted in 2020,” Parsons states, adding that the World Bank predicts that over the next three years, South Africa's economic growth rate will be lower than any other sub-Saharan African country, except Sudan.
The bank’s forecast for growth in the region as a whole in 2020 is about 3.5%.
Another source of uncertainty in the fourth quarter was the vulnerable state of South Africa's public finances, Parsons adds.
“Weak growth had hit tax revenues badly but the Medium-Term Budget Policy Statement (MTBPS) in October 2019 also frankly and realistically acknowledged that, unless more progress was made in reducing the cost-drivers of government as well as those of state-owned enterprises like Eskom and SAA, South Africa was in serious danger of falling into a 'debt trap'.”
Despite the agenda of remedies proposed by the MTBPS, they fell far short of preventing escalating public debt trends up to 2022/23, Parsons laments. How South Africa's public finances were going to be brought under better control remained an important contributor to higher policy uncertainty in the fourth quarter of 2019, with increasing risk of further fiscal “shocks” in the forthcoming Budget.
Further, the NWU Business School mentions that the National Treasury's growth plan in August 2019 recognised the importance of creating a more stable and predictable policy environment in South Africa to strengthen investor confidence and to promote the job-rich growth that the country needs.
“To remedy the situation, Treasury’s growth strategy made a number of key reform proposals that need to be urgently implemented,” Parsons avers, adding that as South Africa enters 2020, “it is clear that, unless decision-makers can reduce policy uncertainty, it will be difficult for South Africa to break out of its current low-growth trap and put the economy on a higher growth path”.