The world is changing fast and to keep up you need local knowledge with global context.
Breaking with consensus, in this piece Cees Bruggemans looks at alternative views on global and local concerns. He questions the US recovery since 2008, China’s ‘potential’ bigger than expected fall and why fracking can come to South Africa’s rescue. All well in theory but even Cees says all ideas are possible and even feasible, but not likely. But at least we know which way risk is blowing, and from which direction. Another insightful piece from one of South Africa’s best. – Stuart Lowman
by Cees Bruggemans*
The consensus view tends to be a tight fit. Where we are, where we are heading, at what pace. But what would be a contrary view, without losing realism, and with what SA implications?
Four main ones come to mind: US, China, SA political paradigm, Karoo.
The standard view about the US economy is that post-2008 it is a slow coach and will remain so for some years. Too much damage to be cleared up, to banks, to property, to labour participation, to business and household expectations, making all more cautious, even if pockets of financial overheating can be identified, thriving on too low interest rates.
A non-standard view would be an unexpected speed-up to more ‘normal’ cyclical recovery (indeed overshooting in a catch-up kind-of-way), in which case markets likely would turn tighter, and inflation could get more easily a grip on things.
That would confront the Fed and markets with a behind-the-curve surprise, inviting mayhem as the Fed forcefully responded with higher rates much faster achieved and markets took fright. This would be a very bad scenario for risky EMs and commodities, having to absorb a lot more strain (heavy currency selloffs). Inflation and interest risk would naturally follow.
The flip side would be if the US economy suddenly would power down. There is no clear reason for expecting this, but if confidence were to be ‘shocked’ (or the Fed misread reality by raising rates too far and fast, inviting pushback), and the US economy started to stumble, the Fed on past performance would ride to the rescue, (by then) cutting interest rates and even powering up QE bond buying.
A yet greater deflationary shock out of China, and the energy patch, could set in motion a deflationary spiral. US labour and product markets, and expectations, are not expected to be easily overcome by such a development, but it is a scenario.
Noticeable of late is the US handwringing about possibly requiring negative interest rates (a Fedfunds of -5% has been mentioned), with yet more bond buying possibly having lost all its elastic (equity markets no longer responding?). This is a dark scenario, whose possible future unfolding is still hidden in much controversy.
Any such liquidity and sentiment injection would be negative for the Dollar and wonderful for EM complexions, likely firming the Rand and commodity prices, and lessening inflation and interest rate risk. But how durably?
The other big risk, in somewhat similar fashion, is China, with its quantum growth addition to the world economy annually still well ahead of America’s ($700bn vs $400bn…).
If China is making a bigger knee-fall than assumed, her growth collapse much more pronounced than currently understood, commodity prices would be much more severely compressed than seen so far, and global anxiety might jump a few notches. The knock-on effects: reduced global growth, fearful asset markets, supportive policy responses in key regions, heavy EM currency selloffs, with severely increased SA inflation, interest rate and growth risk.
With commodity prices already severely compressed since 2011 historic peaks, (iron ore down 70%, oil and coal down 60%, copper by half, precious metals by 40%), it is rather difficult to envisage how much more compression could follow. Still, there are fanciful views in circulation, not least another oil halving to $20.
Conversely, China succeeds in arresting its dwindling growth, and gets faster growth running again from domestic sources, inflaming global confidence (for a while at least), market responses might be enthusiastic, commodity prices and EM currencies likely firming, with inflation and interest rate risk coming off. But how durable would such sparks be?
What are the main up- and downsides of such American and Chinese events? These would be mainly registered in the Rand, and subsequently in our SA inflation and interest rates. The potential variability is huge. Shock downside could mean another 30% off the Rand (targeting 18:$), while surprise easing and risk-on sentiment might swing us in the opposite direction back towards fair value (10:$) but unlikely reaching it on mere rumours. Only a restart to the global commodity supercycle might swing that, and there is no evidence of her potential return.
A meaningful shift in the SA political paradigm is probably least expected of all in the short term, yet on say a five year view could have a dramatic effect, if the business response were to be anything like happened immediately after the 1994 election, when business seemed to realise overnight it had been preparing for four fearful years for the wrong outcome, and then meaningfully changed direction.
In a market economy like the modern South Africa, private business does the heavy lifting, despite different competing policy paradigms. With business confidence very brittle and business defensive and reticent at present, growth is very subdued. If business could be given a credible message, one it could trust and build on, a switch in expectations might follow, greater risk taking could become evident, and the pace of activity could pick up, even if still restrained by electricity shortages.
The ultimate risk, longer term, on a 10 year view would be a concerted effort of the public and private sectors to bring Karoo fracking gas to market, potentially displacing SA’s oil import bill (still $9bn or 2.5% of GDP) and capturing a quarter to half of SA’s future electricity generating market. The wealth so generated and the fixed investment in exploration, exploitation, oil conversion plants (refineries), transmission pipelines, electricity generation and heavy industry applications would in turn provide critical mass to an aggressive growth lift in the 2020s and 2030s, akin to experiences in some energy-blessed African countries in recent decades.
The standard consensus view stops short of such out-of-the-box assumptions, possible and even feasible but not likely. But at least know which way risk is blowing, and from which direction.
*Cees Bruggemans, chairperson, Bruggemans and Associates, Consulting Economists
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