High risk of SA economy hitting recession in 2019, says Moody’s

The odds that the South African economy could experience a technical recession in 2019 are high, according to Moody’s.

The ratings agency released its latest Global Macro Outlook on Thursday. The quarterly Global Macro Outlook presents its latest growth forecasts and assesses the impact of the main trends driving the world economy.

Moody’s attributes what it describes as South Africa’s “persistent economic weakness” to lacklustre domestic private sector demand. It relates to both household spending and investment, and the detrimental impact of widespread power outages on the manufacturing and mining sectors.

The SA economy grew by 0.8% in 2018 after a technical recession in the first half of the year.

“South Africa faces complex economic problems. The task of reviving the economy will be challenging and reforms will take time to show effects,” states the report.

Moody’s expects a gradual pickup in real gross domestic product (GDP) growth in 2019, but expects continued lacklustre momentum. It projects 1.0% growth for the SA economy in 2019 and 1.5% in 2020.

Moody’s expects the SA Reserve Bank to cut the repo rate in future, to support the economy. It expects this move mainly because the latest inflation figures show it is well contained at 4.4% in April. At its May meeting, SARB’s Monetary Policy Committee (MPC) voted three to two to keep the repo rate unchanged at 6.75%.

In Moody’s view, the result of SA’s national elections offers hope for renewed reforms in the country. The SA economy shrank by 0.8% in the first quarter of 2019 compared to the last quarter of 2018. The Moody’s report points out that economic activity in almost every sector – agriculture, mining, industry, transportation and retail sales – declined.

Fixed investment, which has declined every quarter since the beginning of 2018, fell by an additional 1.14% compared to the fourth quarter of 2018. As a result, gross fixed investment is now 5% lower than at the end of 2017.

“With the ANC winning the election with a clear majority under the leadership of President Cyril Ramaphosa, there are hopes of a renewed push for structural reforms aimed at igniting growth and reducing unemployment, which stands at 27%,” states the report.

“Immediate policy priorities outlined by President Ramaphosa include restructuring the highly indebted state-owned monopoly electricity utility operator Eskom and shrinking the size of the bureaucracy. The president has also discussed longer-term plans to diversify the economy away from mining.”

Global outlook

As for the global economic outlook, the report states that a recent escalation in US-China tensions has “clouded” the global economic outlook.

“If the tensions drag on or escalate, they will leave a lasting impact on the global economy. Also, the new US threat to impose tariffs on all imports from Mexico is a reminder of the uncertainty of US trade policy,” states Moody’s

“Secondly, a worsening of tensions between the US and Iran could tip an already delicate balance in the Middle East, potentially sending oil prices soaring and further complicating economic decisions in an already uncertain environment.”

Moody’s also points out that, years after the British electorate voted to leave the European Union (EU), the UK’s path toward Brexit still remains unclear.

“The recent trade and geopolitical developments could put the economy at risk if they result in a significant retreat of global financial markets and an abrupt tightening of financial conditions. In the event of a significant global deceleration, advanced industrial G-20 economies have limited monetary and fiscal policy space for stimulating global aggregate demand.,” states Moody’s.

“Nevertheless, the prevailing accommodative bias among global central banks supports benign financial conditions, stimulus measures in China remain substantial and domestic demand in the US and core euro area economies continues to be robust. Together, these factors will likely provide a counterbalance to the adverse impact of increased trade frictions and uncertainty.”