Looking back at 2019

As 2019 enters its final month and the majority of individuals cast an eye toward their festive season plans, we take a moment to reflect on the year that was 20192019 was rung in with hope and optimism that the prolonged economic downtown which has beleaguered the South African economy would end. Unfortunately, 2019 did not realise these hopeful expectations – the economy continues to remain subdued.

The South African Reserve Bank’s Monetary Policy Committee (MPC) meet every two months to discuss the economic climate which ultimately results in a decision on whether to raise, lower or maintain the repo rate.

The table below highlights a few key forecasts taken from the last MPC meeting of 2018 and compares them with the forecasts from the last MPC of 2019.

The change in the 2019 forecasts, from November 2018 to November 2019 paint a somewhat sombre picture of the South African economy in 2019. The silver lining is that consumer price inflation is expected to come in well below the November 2018 forecast. Positive inflation performance provides room for the repo rate to be cut and stimulate economic activity, however this has not been the case. The MPC stated that they would prefer a prolonged period in which the inflation rate is closer to the midpoint of the inflation target and hence have decided to keep rates constant at this time. Over the same period, the GDP growth forecast and the real effective exchange rate have deteriorated.

Similarly, the GDP growth forecast for 2020 has declined from 2% to 1.4%. Comparing this against the expected global growth forecast of 3% (for 2019) illustrates that South Africa’s economic growth is lagging in comparison to other countries. The unemployment rate has also spiked when comparing the third quarter of 2018 to the third quarter of 2019. Currently the unemployment rate is reported as 29.1% (up from 27.5%). The main reason for this increase is an increase in the labour force, coupled together with a decrease in formal sector employment.

A further concern for the South African economy is the debt to GDP ratio. Currently this figure sits at approximately 60%, however, according to the Institute of International Finance, this figure could rise to 95% by 2024. Similarly, ratings agency Moody’s expects this figure to rise to 68% by 2021. Although the picture painted is a concerning one, it is by no means a damning picture as increasing levels of economic growth are expected in 2020 and 2021.

The information contained within this article so far appear to paint a grim picture of the economy, however, there were moments of positivity in 2019. The second quarter of 2019 recorded economic growth of 3.1% which is high by recent standards. In the medium term budget speech, Finance Minister, Tito Mboweni stated that government would be taking a tough stance on SOE finance and the state would no longer bailout state owned institutions (future funding would only be in the form of loans).

In the same speech, Mboweni hinted that government’s tougher stance on debt could result in increased income taxes when the next budget speech is announced. Increased taxes would hurt consumer spending but it is a sign that government is aware of the danger posed by the rising national debt levels and is taking steps to address this. Although government’s commitment to fighting rising debt levels is admirable, they should remember to focus on its own role in increasing government debt as irregular expenditure in 2019 increased by approximately R10 billion in comparison to 2018.

Stopping this kind of internal financial waste should be at government’s core if it intends to increase the tax burden on individuals. The current inflation levels provide room for a rate cut which could stimulate consumer demand and hence economic activity. Whether or not such a rate cut actually takes place is dependent on the MPC’s risk aversion but the fact that room for such an economic intervention is available is positive news.

In recent years the South African economy has struggled to rebound from its protracted levels of weak economic performance. 2019 was yet another year characterised in the same way. Although 2019 was not a fruitful year in economic terms, it was by no means an economic “annus horribilis” as there were signs that government will be taking a bolder stance on numerous economic issues.