The International Monetary Fund (IMF) cut both global and South Africa’s growth forecast on Tuesday, with some claiming that the world is on the verge of another global recession. The IMF has downgraded South Africa’s growth forecast to 1.5%, while global growth is currently at levels close to those during the 2008/2009 financial crisis. But what does this mean for the South African consumer?
Chris Wehmeyer, portfolio manager at PSG Wealth, noted that the figure released by the IMF is realistic. “The IMF usually comes out a little bit late, although Treasury has said, and Reserve Bank have said that the growth is going to be lower, I think it is more or less realistic what the IMF is saying. There is no surprise in that figure.”
Peter Worthington, senior economist at Barclays, agreed stating: “I think the downgrade for this year is more or less in line with where we, the Reserve Bank and the World Bank have all forecast down to, and where I am pretty sure the Treasury is going to bring their forecast down to somewhere around that level.”
However, while many experts agree that the growth forecast for South Africa is realistic, there is disagreement about whether we are facing another global recession, as many countries are still experiencing growth.
A global recession?
“[The IMF] forecast 3.1% global GDP growth this year and an acceleration to 3.6% next year. We are concerned that the risks to this view are to the downside, but we expect the global economy to continue to grow as developed market economies such as the UK and US are experiencing a stable and persistent improvement in domestic demand and investment. The risk to the global economy lies in the emerging markets where low commodity prices, weakening currencies and rising inflation are weighing on growth. At this stage we don’t think that these risks are sufficient to create a global recession,” stated Alex Smith, a First National Bank (FNB) economist.
Wehmeyer noted that the global economy is fragile, and pointed out that many countries are not implementing rate hikes at present in a bid to keep their economies going.
However, if the global situation worsens, Wehmeyer revealed that, especially since South Africa is a commodity producer, “it could mean that those prices could remain lower for longer. But we do believe that we are in a trough, and pretty much close to the lowest point in the cycle.”
Worthington noted: “I’m a little sceptical [about there being another global recession] because it is true that China is slowing, but we still expect it to grow, we’re expecting Europe as a region to grow, and we’re expecting the US to continue to grow, albeit at a somewhat moderate pace. And we’re still expecting Africa to grow.
“My understanding of recession is that you have two successive quarters of negative growth. I find it hard to believe that that is going to play out in the global economy, all these regions are growing, it’s not statistically impossible, but it seems to be to be unlikely. But I do think we are looking at low growth globally and that’s not great news for a country like South Africa. We perform best when global demand is really pumping along,” said Worthington.
Does the IMF downgrade of SA affect us?
Wehmeyer pointed out that as the markets were already priced at about 1.5% growth, there will not be a big impact following the IMF’s announcement. However, he noted that there are a number of sectors and industries which are putting pressure on the South African economy, which in turn are affecting the country’s growth.
Smith said: “We have been forecasting a growth rate at below 1.5% for some time now, so it is no surprise that the IMF has joined us. Our forecast reflects very low consumption and investment spending growth which will keep overall economic growth depressed. It does, however, reflect an improvement in export growth which partially cushions the blow of such weak domestic spending growth.”
Worthington noted that he does not believe that the IMF’s downgrade will have implications for South Africa. “I don’t think it, on its own, their change and the number change, changes the picture dramatically.”
Furthermore, Worthington revealed: “The downgrading of the IMF’s forecast will not impact on consumers. But the fact that growth is going to be weak means that job creation is likely to be very weak as well, which means consumer incomes will be weak and therefore consumer spending,” revealed Worthington.
Wehmeyer highlighted that consumers are under a lot of pressure at present, with many companies retrenching staff. “Consumers are under unbelievable pressure. I think this is not going to be a good Christmas 2015, especially for the consumer, I don’t think we’re going to see massive strength in the retail sector.”
According to Wehmeyer, consumers should spend less during these uncertain times and try to save money. In addition he noted that people should pay off their debts. “It is just a very difficult time now, and with all this uncertainty and people are very insecure about their jobs, you must keep your debt levels low.”