What a tumultuous start to the year! I began writing this column on house prices in South Africa, but soon realised we are entering uncharted economic waters.
What a tumultuous start to the year! I began writing this column on house prices in South Africa, but soon realised we are entering uncharted economic waters.
At the centre of the turmoil is the oil price, an internationally traded commodity vital to economic activity. This week it fell below $50 a barrel.
The value of the rand and the prices of commodities we export are also falling. Load-shedding or more exactly planned power outages may become a feature of our lives again.
The US is doing well, but Europe, the group of countries that is our biggest trading partner, looks shaky, and a lot of countries in Africa that prospered when oil prices were high, including Angola and Nigeria, will feel economic pain and with that possible economic turmoil.
Along with that, African countries that depend on commodity exports will also see the economic growth rates of recent years pared back. There is little hope in looking East.
Growth in China, the country that is our biggest trading partner, appears to be slowing down. When oil prices reached unheard-of levels just before the Global Recession of 2009, few believed oil prices might fall to present levels.
Goldman Sachs predicted at the time that the cost of a barrel would hit $200. The oil price plummeted, along with every thing else when the Global Financial Recession turned into a Global Recession.
The world quickly pulled out of what looked like a fatal dive. The problems persist, however, and the outlook for this small, open economy is cloudy.
That the price of oil has fallen is good news for the country because despite Sasol’s fuel-from-coal operation, we still import large quantities of oil. Low oil prices mean lower inflation, and therefore less reason for the South African Reserve Bank to put up interest rates to contain inflation.
The bad news about low oil prices is that oil is a commodity, and the reason that the price has fallen – as well as being allowed to continue falling by the Opec cartel – is that commodity prices seem to be falling too. South Africa makes a good deal of its foreign exchange by exporting commodities like iron ore and coal. So this will balance out the boon of low oil prices to some extent.
To complicate matters, the fact that a dollar buys more rands also boosts the rand income of the commodity exporters, so a rand-dollar decline is not entirely negative.
To complicate matters even further, we won’t feel the full benefit of the oil price decline because we need more rands to buy the lower-priced oil that is processed to make fuel. Economic growth in South Africa may be a bit higher than last year.
It almost has to be, given that 2014’s anaemic growth was caused by events that should not be repeated, such as the platinum mine strike, which cost the country billions in lost production.
In October last year, in the mini-budget, growth was estimated by Treasury to be around 1.4% for 2014.
Then, the Treasury expected growth this year to be around 2.5%. Yet this low figure may prove optimistic. The World Bank recently trimmed its growth forecast for the world economy from 3.4% to 3%.
A literal and figurative dark spot is that Eskom’s programme to build new power stations still hasn’t caught up with demand and power outages loom. Ironically, if economic growth were higher, and therefore electricity demand were greater, it would be even harder for Eskom to keep up.
This is small consolation. Since the major employer in Makana remains the South African government, you might expect the city to be somewhat insulated from global events.
As the salary increases this past year at Rhodes University attest, that is not the case.
Slower economic growth is not recession, however, and perhaps we should not talk ourselves into a slump. Nor is a decline in commodity prices necessarily altogether bad, in that continually surging prices of anything prompt manufacturers to substitute and make other plans.
An example of this from the past was the increasing use of glass in motor cars in the 1970s to keep down the amount of steel used. Also, a spell of continuing low commodity prices could finally prompt South Africa to do more to beneficiate our raw materials.
Exporting products that have been processed rather than simply shipping out what we dig out of the ground is something the country has been talking about since the 1970s.
Beyond beneficiation, it is striking how valuable intellectual property has proved. One of the most valuable companies in the world, Apple, does not even own its manufacturing facilities.
Apple’s market value of around $640 billion is larger than, say, Sweden’s entire economy. As a university town we should be thinking about how to spur home-grown intellectual innovation.
* Reg Rumney is the director of the Centre for Economics Journalism in Africa at Rhodes University. Read previous columns at www.grocotts.co.za/columns/On-The-Money. This column appeared in Grocott's Mail on 16 January 2015.
