1. GDP
According to the World Bank and the South African Reserve Bank (SARB) the South African Gross Domestic Product (GDP) for 2018 is expected to average between 1,1% and 1,2% respectively. This prediction is however depending on the fact that developed economies are expected to moderate to 2,2% growth in 2018, which may be underestimated if the global economic upswing turns out to be greater than expected. It is therefore a possibility that these predictions may be slightly conservative. These academics predict that a positive local political outlook could contribute to a higher GDP growth of between 1,5% and 2,0% for South Africa in 2018.
2. Inflation
In January 2018, the South African inflation rate was 4,4%, which is comfortably within the SARB’s target of 3-6%. The SARB predicts an average Consumer Price Index of 4,9% for 2018. The pressure on inflation is however expected to increase in 2018, taking into account factors such as the 52c hike in the petrol price and the 1% increase in VAT in April, and the implementation of a national minimum wage of R20 an hour from May. It would therefore not be surprising if the inflation rate comes closer to the upper bound of 6% during 2018. Movements in inflation are still mainly caused by cost-push factors rather than by demand-push factors.
4. Interest rates
The repo rate which is currently at 6,75% is set to maintain the SARB’s inflation target (3-6%). Since the SARB expects the inflation rate to be 4,9% in 2018, there is a possibility that the repo rate may be reduced in March 2018. Prof Meyer and Caro furthermore suspect that the repo rate will remain unchanged, because potential future inflationary pressures are expected during 2018.
5. Exchange rate (R/US$)
A change in the political atmosphere – since the appointment of Cyril Ramaphosa as President of South Africa – is evident amongst citizens and industry role players alike. However, the value of the Rand against the US Dollar remains volatile. The main aspects that could negatively impact the exchange rate are political infighting by the ruling party, continuing week performances from the State Owned Enterprises, and possible downgrades by ratings agencies. It is anticipated that the currency will depreciate slightly during 2018 to end the year at between R11,60 to R12,50 per US$, but the Rand is expected to be more stable during the year.
6. International trade and the current account
The current account of the balance of payment reflects the inflow and outflow of money of South Africa relative to the world. The trade account which reflects imports and exports is included in the current account. If the current account reflects a negative figure, it must be financed by foreign currency. These loans and investments from abroad are reflected in the financial account of the balance of payments. To attract foreign investments, the SARB must adjust interest rates according to developments abroad to make sure that the interest spectrum in South Africa is favourable to attract enough capital to finance the deficit on the current account. The deficit in 2017 was 2,1% of the GDP. It is expected that the deficit in current account balance for 2018 will stabilise between 2,5 and 2,8% of GDP. Lastly, South Africa recorded a positive balance of trade during 2017 and this trend is expected to continue, depending on currency stability.
7. Commodity prices
Globally commodity prices have shown a marginal improvement during 2017 and this is expected to continue in 2018 under the current economic conditions. Slight increases in commodity prices of between 1,0% and 3,0% are anticipated. Regarding the steel industry, the demand for 2018 is predicted to increase only by 1,6%. This low-demand increase will also result in only a slight increase in steel prices. China has however indicated that they will reduce production of steel as their economic growth has slowed down during 2017. This possible drop in production should lower the supply of steel globally, leading to a limited increase in the price of steel.
8. Oil and petrol price
There are two factors that influence the petrol price in South Africa. Firstly, the price of Brent oil in the international market, and secondly the Rand/US$ exchange rate. The price of Brent oil moved in a narrow band in the second half of 2017 and first few months of 2018 between $60 and $70 per barrel, with a current level of $67. The forecast by the SARB for 2018 is around current levels. It is expected that oil prices could move between $60 and $70 per barrel during 2018. On 1 April the new fuel levy will add 52c per litre to the petrol prices. It is expected that both the Brent oil price and the exchange rate will be stable during 2018 and it is therefore expected that no major increases will be occurring during 2018.
9. Politics
International organisations continue to propagate the importance of “market fundamentals”. These are usually broadly related to managing inflation, keeping debt under control, ensuring economic growth and upholding the importance of private property rights. While this may toe the policy line of the International Monetary Fund, World Bank and ratings agencies, the question facing South Africa’s new president, Cyril Ramaphosa, is whether this relates to a tangible change in the lives of the poor.
President Ramaphosa is ranked as one of the richest men in Africa, and this in itself raises some pertinent questions: Can he realistically be expected to relentlessly and unerringly make decisions that directly benefit the poor, with absolutely no conflict of interests? This question relates more broadly to one of the most relevant economic debates of our century – what is the relationship between growth and poverty alleviation?
Based on President Ramaphosa’s commitment to push for 3% economic growth in 2018 and 5% by 2023, it would seem as if he has indeed decided that his growth must be inclusive growth. Whilst growth is certainly a necessary condition for improving the lives of poor South Africans – whether there will be a distribution of this growth to those who need it most – remains to be seen.
What we know with certainty is that investors require policy certainty. The President is expected to create this environment to ultimately drive investment during 2018.
Prof Danie Meyer and Caro Janse van Rensburg.
