Gill Marcus: Outlook for the South African economy against the
background of global economic developments
Address by Ms Gill Marcus, Governor of the South African Reserve Bank, at the Dinner in
Honour of Ambassadors and High Commissioners to the Republic of South Africa, Pretoria,
2 October 2014.
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Your Excellencies, Ambassadors, High Commissioners, Counsels and Diplomats, good
evening. Thank you for kindly accepting our invitation to this dinner, which is becoming a firm
feature of the annual diplomatic calendar. We live in an interconnected world, and the
lessons of the past few years show the need for cooperation and collaboration. The global
financial crisis impacted in some way on most economies, and we are still feeling the effects
as the recovery continues in a hesitant manner. And the nature of the recovery in smaller
economies such as South Africa is shaped, to an important degree, by the speed and nature
of the recovery in advanced economies. This evening I will give a brief overview of how we
see the global economy evolving and then focus on the outlook for the South African
economy in the challenging global and domestic context.
For some regions in the world, the past year has been better than the previous one, though
the recovery is far from assured or complete. The United States is projected to grow strongly,
especially in the second half of this year. After gaining momentum for several quarters,
Japan's growth seems to have faltered. China has been able to maintain growth above 7 per
cent despite a significant economic and political transition. The UK economy is accelerating,
with unemployment rates continuing to fall. Growth has improved in India, buoyed by a new
optimism since the elections. Despite lower commodity prices, growth on the African
continent remains robust. Most emerging markets have weathered the turbulence caused
first by "taper talk" and then by actual tapering, which is likely to conclude this month. The
Eurozone is the key exception. Peripheral Europe is experiencing positive growth, albeit at a
low level. The Germany economy, however, contracted in the second quarter while growth in
France remained at around zero. The Eurozone remains a significant market for South
African exports. Low European inflation and the risk of deflation point to weak potential GDP
growth with structurally weak demand across the monetary union.
After a period of relative calm in financial markets, volatility has increased recently, with the
key trends being the strength of the US dollar, a weakening Euro and lower commodity
prices. Considerable risks and imbalances in the global economy remain and policy makers
have to remain vigilant.
It is highly likely that, after a long period of a synchronised downturn in the economic
performance of advanced economies, next year will be characterised by an asynchronised
recovery. The US economy appears to be in the advanced stages of repair with a declining
degree of slack in the labour market. While there is uncertainty about the pace at which
discouraged jobseekers will return to work, there is optimism that wage and income growth
will return in the course of the next year. US corporate investment is rising and the fiscal
metrics look better than last year. The UK is in a similar situation, perhaps even more
advanced in their recovery, evident in falling unemployment and rising productivity. It is quite
likely that these two economies will begin tightening monetary policy in the first half of 2015
and while the rates normalisation process is likely to be gradual and prolonged, given
continued fragility in the global economy, interest rates are likely to be on their way up.
The monetary policy situation in the Eurozone is vastly different. Persistently low inflation
threatens to unhinge long term inflation expectations, increasing the likelihood of deflation.
Europe's leaders recognise that higher inflation, on average, is critical to enable the
economic adjustment process in peripheral Europe to continue. Last month the ECB reduced
their key policy rate to 0.05 per cent and took their bank deposit rate further into negative
territory. A commitment to purchase asset-backed securities from the commercial banks,
designed to stimulate bank lending, was also announced. Furthermore, the ECB made it
clear that if these measures did not work, they would consider more generalised quantitative
easing, including the purchase of government bonds.
Even though Japanese inflation is at a five year high, long term inflation expectations in
Japan remain low and hence policy makers are unlikely to withdraw the current monetary
policy stimulus.
There is rising confidence that China's transition away from investment and exports towards
domestic consumption will be managed smoothly. Risks in the housing market and related
risks in the shadow banking sector remain a concern but, to date, the authorities have
managed the adjustment without significant negative shocks. China's adjustment process
does have a dampening effect on commodity prices, which impacts many emerging markets
including those in sub-Saharan Africa. However, the possibility of higher Chinese
consumption could provide a boost for the world economy over the longer term.
Foreign investment on the African continent is diversifying towards sectors outside of mining
and oil. Investment in infrastructure, housing, retail, banking, telecoms and tourism continues
to accelerate, sustaining growth rates in most sub-Saharan African countries.
In the year ahead global financial market conditions, in other words global liquidity, are likely
to become more challenging. This should, however, be offset by improving growth prospects
in the real economy. Countries with sound fiscal and monetary positions and those with
higher savings rates are likely to benefit from this complex interplay of rising interest rates
and improving economic performance in advanced economies.
In this complex milieu, South Africa's economic performance is disappointing. Projected GDP
growth of 1.5 per cent this year will mark the fourth consecutive year of slowing growth.
Global factors, in particular falling commodity prices and declining global liquidity, are
contributing to our below par performance. Furthermore, lower demand for commodities from
China and slow growth in Europe, our major trading partner, have affected our export
performance. However, in the main, the reasons for our slow growth are domestic.
The five month-long strike in the platinum sector, followed by a month-long strike in the iron
and steel industry, resulted in negative spill-over effects for the entire economy. These two
strikes reduced manufacturing output and depressed household consumption, which
negatively impacted on the performance of retailers, contributing to the downward revision to
our growth forecast. Strikes are not usually a macroeconomic issue. They tend to occur
every few years and are generally settled peacefully and speedily. But in the past two years
strikes appear to be longer and more violent, with an apparent breakdown in the tried and
tested dispute resolution processes contained in our labour relations regime. Without
assigning blame to any party for this breakdown, a fraught labour relations environment
cannot be consistent with policies aimed at growing labour intensive sectors of the economy.
Of particular concern are high salary settlements that are out of kilter with inflation and
productivity growth. Firms often adjust to such salary increases by reducing staff numbers.
About 48 000 jobs have been shed in the mining sector in the past two years and more
mining companies have announced plans to reduce staff numbers. Similarly, in the past few
months, the media have reported on planned retrenchments by MTN, Telkom and Ellerines.
In a country with an unemployment rate of 25.5 percent, this trend has to be of concern to
policy makers.
The second immediate constraint on the economy has been electricity supply. Electricity
production has been flat for almost six years. While energy efficiency has enabled many
firms and households to continue operating with less electricity, many sectors of the
economy have had to curb production. Affected sectors include construction, mineral
beneficiation and manufacturing. While South Africa has successfully brought about 160 mW
of renewable energy into the grid, this boost is too small to make a difference to the
aggregate capacity. The National Treasury estimates that electricity shortages have cost the
economy about half a percentage point of growth a year, with this figure possibly being
higher in 2014.
These two features, labour disputes and electricity shortages, have contributed to low levels
of business confidence and investment, both of which are impacted upon by perceived policy
uncertainty, particularly in areas such as mining and agriculture. Firms are reluctant to invest
because they are uncertain about future demand and labour and energy costs. In turn,
consumer demand is weak because firms are not investing and employment is not growing.
Generally, governments break this cycle through higher public investment spending. South
Africa is in the midst of a major public investment programme, focused largely on energy and
freight logistics capacity. Despite positive growth in public investment, it has not been
sufficient either to crowd in private investment or to lift the aggregate employment picture. In
the 2nd quarter of 2014, private sector investment growth was negative for the first time
since 2009.
At the same time as the economy has been performing poorly the central bank has had to
contend with rising inflation. Inflation was above our target range of 3 to 6 per cent for one
quarter in 2013 and has been outside the range since March this year. This combination of
slowing growth and rising inflation is a difficult one for central banks to manage. The picture
is complicated by the fact that normally, when growth slows, imports slow, reducing the
current account deficit. This time, despite slower growth, imports remain sticky. And despite
an exchange rate depreciation of almost 40 per cent since 2012, export performance has
remained weak. This implies that South Africa still has a large foreign financing requirement
at a time when global interest rates are rising and confidence in the domestic economy is
sub-optimal.
Theories as to why exports have not done better given the weaker exchange rate range from
poor European growth and slower demand from China to more fundamental competitiveness
and structural problems in the South African economy. The reality is that both weaker growth
in our key markets and faltering competitiveness in key export sectors are impacting on
South African exports.
The main driver of higher inflation has been the effects of currency depreciation, which in
turn is due to lower commodity prices and changing monetary conditions. Secondly, higher
food prices have contributed to higher inflation in 2014. While the pass through from the
weaker exchange rate into generalised inflation has been more muted than in previous
episodes of depreciation, there is evidence of second round effects and the Bank has
expressed its concern about rising salary expectations and a wage-price spiral.
The Bank raised interest rates by 50 basis points in January this year and by 25 basis points
in July. Notwithstanding these increases, the policy interest rate remains close to zero in real
terms. Monetary policy remains accommodative, cognisant of the weak real economy.
Going forward, it is possible that inflation will return to within the target range in the first
quarter of 2015, but is likely to remain close to the top of the band. Also of concern is that
core inflation is rising towards the top of the target range. Upside risks to inflation include
higher electricity prices, rising wages and further depreciation of the exchange rate, which
could be sensitive to changes in US interest rates.
The Bank has repeated that while monetary policy can be supportive of growth in the
shortterm, higher trend growth requires a range of economic reforms including faster public
infrastructure spending, better quality education and more effective dispute resolution
mechanisms in the labour market. It is not within the realm of monetary policy alone to deal
with the myriad of challenges confronting the economy. Unrealistic expectations or
demanding too much from monetary policy is likely to end in a loss of policy credibility. At the
same time, monetary policy should be as supportive of growth as is possible, inflation
permitting. Indeed our monetary policy has remained highly accommodative, notwithstanding
significant price pressures.
This year saw the first significant banking failure in almost a decade. The South African
Reserve Bank intervened to manage the failure of African Bank, first through requesting the
Minister of Finance to place African Bank under curatorship and secondly by putting in place
a package of measures that are in keeping with the Financial Stability Board's key attributes,
aimed at enabling the institution to continue to operate and to serve its customers, which it is
continuing to do.
The Reserve Bank acted quickly to prevent contagion to the rest of the banking sector. Not
only is South Africa's banking sector healthy, but all the major players are liquid and well
capitalised. So far, we have not seen any significant adverse effects of the difficulties at
African Bank on the broader financial markets or the economy, though we remain vigilant.
The challenges posed by African Bank's failure raises several policy questions that are of
relevance for many countries in the world. How do we define financial inclusion in a
developing country context? For many, financial inclusion refers to the ability to access
credit. While access to credit is important, surely financial inclusion should also focus on
enabling poor households to accumulate assets, transact efficiently and insure against the
normal risks associated with everyday life. South Africa will continue to take steps to promote
financial inclusion but we will not tolerate unhealthy lending practices or excessive risk-taking
in the financial sector.
The second policy challenge that African Bank has brought to the fore is the degree to which
the financial sector and the banking system in particular is interconnected and
interdependent. This is a difficult balance to strike because, from an individual bank or company
perspective, inter-dependencies reduce risk. However, from a system perspective,
interdependencies increase risk. We all have much to learn about how we promote financial
deepening and integration but protect the system against systemic risk.
As a reflection of our commitment to enhance a sound and effective financial sector, and
learn from the global crisis, South Africa's adoption of a "twin peaks" regulatory framework
will be formalised in the course of the next year, with legislation setting out the roles and
responsibilities of all parties in the financial regulatory architecture. This legislation draws on
both international and our own experiences, creating a Prudential Authority with the Bank,
and a Market Conduct Authority that will take the place of the Financial Services Board.
In conclusion, the world economy is in a better position than a year ago, but the crisis is not
over and significant risks remain. Global trade is rising, after stagnating for several years.
Notwithstanding a withdrawal of liquidity in some advanced economies, financial flows
continue to impact on emerging markets. 2014 flows to South Africa have been volatile and
at an elevated price, with September seeing significant outflows such that year to date flows
are negative at some R22bn. Experts are beginning to talk about prices of several
commodities reaching the bottom, with the potential for a period of either stability or modest
price increases going forward. These trends should support growth going forward in
subSaharan Africa, particularly given the significant discoveries of oil and gas. On the other
hand, geopolitical factors continue to affect growth in Europe, the Middle East and North
Africa. The keenly contested Scottish independence referendum also affected market
sentiment, and the political ramifications will not simply disappear even though the outcome
was a victory for the "no" vote. The Ebola outbreak in West Africa will affect regional GDP
growth, trade and air travel. In many countries around the world, job losses incurred during
the financial crisis are likely to turn into permanent decreases in productive capacity. Global
unemployment and particularly youth unemployment is still unacceptably high in almost
every region in the world.
South Africa remains concerned that, whereas the world came together in 2008-09 in a
coordinated response to the global financial crisis, policy today is more inwardly focused and
disparate, rather than coordinated and coherent. The world economy still needs a high level
of cooperation and partnership in order to complete the recovery process. We still need joint
activity to ensure faster growth.
Our responsibilities, as leaders of our respective countries, are not just price or financial
stability. While these elements are important, our collective objective is for higher economic
growth, shared prosperity, greater opportunities and a better life for all our citizens. And
given the prevailing economic outlook and risks, it is incumbent on all of us to get our own
houses in order, take the tough decisions, make the necessary trade-offs and work together.
The effort this year in the G20, under Australia's able presidency, to increase collective
growth by an additional 2 percentage points by 2018 is a good example of the kinds of
measures that we need.
Honourable guests, the South African Reserve Bank is proud of our track record in engaging
with our citizens and other stakeholders, both local and foreign. We will continue to deepen
our engagements in order to be part of a global movement for shared prosperity. You know,
but we wish to repeat, that we are open to interaction and conversation with you and look
forward to continued collaboration and cooperation as we work together for a shared future.
As all of you know, my term as governor ends in a few weeks' time. I would like to thank the
diplomatic community for the support and cooperation that you have given, not just to me,
but to the South African Reserve Bank and to South Africa in general. This singular honour,
to serve as governor of the South African Reserve Bank, has enabled me to serve my
country, and form friendships and ties across the world; ties that I will maintain long into the
future.
Thank you.