Global Economic Outlook 2012 The global economy is on a narrow path of slow and fragile recovery Oil and commodity prices remain high and will continue to put further pressure on the global economy South Africa’s robust financial institutions and moderate fiscal and external debt absorbed the impact of the global downturn to a large extent. However, the country needs to address its structural challenges including, unemployment, education and inequality in order to be a global economic player
Introduction A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP) Refers to the market value of all officially recognized final goods and services produced within a country in a given period. Is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle. The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration. Recession: Gross domestic product (GDP) Depression: Business cycle:
Global outlook Source: Economic Intelligence Unit, March 2012
Global outlook Source: Economic Intelligence Unit, March 2012 The global economy is on a narrow path of slow and fragile recovery. Many countries are struggling with a massive debt burden and high unemployment persisting to bog down their economies and hampering growth. Oil and commodity prices remain high and will continue to put further pressure on the global economy
Global outlook According to the Economist Intelligence Unit’s (EIU) March economic outlook, world GDP is expected to grow by 2.1% on a market exchange rates basis in 2012, slowing down markedly from the previous two years. Source: Economic Intelligence Unit, March 2012
Changes in global economic risks North American region Asia pacific region Middle East region African region Latin America & the Caribbean region Greater Russia region Europe region Source: Energy Policy Scenarios to 2050, World Energy Council (values in mn tonnes) Production (Mn tonnes) Consumption (Mn tonnes) Compounded annual growth rate consumption Legend 0.9% 1.8% 1.2% 0.8% - 2.4% - 1.2% - 0.9%
Energy intensity Economic growth is closely related to growth in energy consumption because the more energy is used, the higher the economic growth. However, it is possible to decouple energy consumption and economic growth to some extent. More efficient use of energy may entail economic growth and a reduction in energy use. Economist Intelligence Unit, KPMG calculations
Cumulative investment in energy infrastructure require 2011 – 2035 Natural Gas - $9.5 trillion Bio-Fuels - $0.3 trillionCoal - $1.1 trillion Power- $16.9 trillion World Energy Outlook 2011, (2010 real terms)
Global outlook The economy grew by 1.7% in 2011, but grew by 2.8% in Q4 of 2011. The inflation rate for 2011 doubled to 3.2% from 1.6% in 2010. Growth prospects for Q1 2012 are around 2 to 2.2% on the back of a gain in consumer confidence’s subsequent retail sales and manufacturing. Persistently high unemployment and risks of downturns in markets abroad will keep the FED’s policy rate at very low levels until even as late as 2014. United States European economic growth slowed during 2011 to 1.5% and is expected to contract further in 2012 to -0.3%, before a modest recovery in 2013. Inflation should remain relatively low and contract to around 2.2% in 2012 from the 2.7% observed in 2011. The European debt crises threatened to derail global recovery for the last two years Europe Manufacturing in Japan is already experiencing a v- shaped recovery after the March 2011 earthquake and tsunami. GDP is expected to grow at around 1.5% in 2012 on the back of reconstruction activities and a recent upswing in machinery exports and local consumption. Japan
Global outlook Emerging Markets The BRIC countries are recognised as having very large economies and populations, with unravelled growth potential in foreseeable years. The Brazilian economy experienced rapid expansion in the last decade with strong economic growth Russia experienced strong economic growth over the past few years, but manufacturing and foreign investment slowed down since the global downturn. BRICS The Next 11 consist of South Korea, Iran, Mexico, Turkey, Philippines, Indonesia, Egypt, Nigeria, Pakistan, Vietnam and Bangladesh. These economies are smaller in size than the BRIC countries, but with its large population size and growth rates of above the global average, promises favourable opportunities for future investment and market growth. The Next 11 Fears surrounding an economic downturn have lead EM central banks to either cut their interest rates or postpone monetary tightening during 2011. Market expectations are that EM countries will outperform developed countries between 2013 - 2016, as interest rate differentials will favour investment into these EM countries over that of the OECD economies.
Where are we now? Structural changes in Africa enabled significant increased labour productivity over the last decade. Rapid urbanisation is allowing increased access to markets and it is expected that by 2030, 50% of Africans will be living in cities Overarching theme in Africa has been the inability of economic growth to create employment to a sufficient degree. Increasing water stress and loss of habitat and biodiversity are further areas of concern, with constrained agricultural production and food insecurity increasing. Improvement in physical, legal and governmental infrastructure, together with the reduction of corruption, crime and unfair business practices are needed to allow for an enabling environment able to attract investment. Intra-African trade has been lacking and will benefit greatly from these improvements.South African trade comprise 50% of total African trade, with only 11% of this number being intra-African.
Where are we now? Sub –Saharan Africa Angola Angola’s increased oil output contributes about 85% of GDP and recent natural gas developments will result in a high GDP growth rate. Democratic Republic of Congo Congo (or the Democratic Republic of Congo), though incredibly richly endowed with natural resources, remain one of the countries which citizens are among the poorest in the world very high rates of inflation agriculture industry – employing more than 75% of the working population Ethiopia Ethiopia has been one of the fastest growing African countries in the past few years as a result of some modest economic reforms Africa’s largest exporter of coffee and second largest maize producer, as well as a big producer of livestock
Where are we now? Sub –Saharan Africa Ghana Ghana remains one of the world’s biggest gold producers and other exports include cocoa, natural gas, timber and diamonds. Mozambique Mozambique is a resource rich country, producing food, beverages, chemicals, aluminium, petroleum products Infrastructure development, especially electricity, is necessary to increase output and create more investment opportunities. Nigeria Nigeria’s vast population size and well developed financial and communications sectors continue to attract mobile phone networks and banks looking to capitalise on the large amount of unbanked individuals. Zambia Zambia is a large producer and processor of copper and this hard commodity is its main export, with agriculture being an important pillar of the economy.
Where are we now? 2001 - 2010 2011 – 2015 : Forecast 2001 - 2010 2011- 2015 China 9.5 Nigeria 6.8 Zambi a 6.9 Tanzania 7.2 India 8.2 Congo 7.0 Vietnam 7.2 Angola 11.1 Rwanda 7.6 Cambodia 7.7 Nigeria 8.9 Kazakhstan 8.2 Ethiopia 8.4 Myanmar 10.3 China 10.5 Chad 7.9 Mozambique 7.9 Ethiopia 8.1 Mozambiqu e 7.7 Ghana 7.0 Source: IMF World Economic Outlook, February 2012 Most of the fastest developing economies are in the Sub- Saharan region
Where are we now?: North Africa Algeria Algeria is renowned for its oil and gas reserves, and these resources have dominated its export industry and continue to contribute greatly towards the country’s GDP Egypt Egypt experienced a period of accelerated growth following reforms to stimulate investment during the last five years The economy is based on agriculture as well as exports of their natural resources including oil, coal, natural gas and hydro power. Libya Libya is slowly recovering from a crippling civil war and like some of its neighbouring countries Morocco Morocco is the world’s largest exporter of phosphorus and mining, construction and manufacturing make up just over half of the country’s GDP. The high import cost of oil will continue to put pressure on the Moroccan economy as the price continue to remain high. Unemployment and inflation is relatively low Tunisia The country has a diversified economy, ranging from mining, agriculture, manufacturing and petrochemicals to tourism which was heavily impeded on during the revolt. Inflation remains relatively moderate, High levels of unemployment, especially among its youth.
Where are we going?: Future trends The future 60 The number of people per square kilometre (population density) by 2050 (UN) 10% Old age dependency ratio of 10% by 2050 (UN) >1.8 billion Africa’s population by 2050 (UN) 4.9% Sub-Sahara GDP growth rate in 2015 (EIU) Current 22 The number of people per square kilometre (population density) (UN) 6% Old age dependency ratio (UN) > 1 billion Africa’s population (UN) 5.5% Sub-Sahara GDP growth rate in 2011 (f) (AEO)
Where are we going?: Future trends Infrastructure expansion and network growth are areas of development in the future, speeding up national processes and connecting Africa to the rest of the world. Africa currently spends $45 billion per annum on infrastructure, when it should be spending about $93 billion in order to catch up with other developing regions in the next ten years. Africa is a net importer of food and unable to meet local demand. With 60% of the world’s uncultivated arable land and low crop yields Africa has enormous potential for a “green revolution” similar to those seen in Asia and Brazil The impact of climate change could be severe, seeing that 96% of Africa’s agriculture is extremely rainfall dependent Infrastructure expansion Challenges Africa faces Climate change Food import
SA and the global economy ×Population 10 million people ×Economy 67% ( R1100 bn to R1834 bn) ×GDP per capita 28% ( R28 536 to R36 591) ×Real Disposable income 32% ( R17 775 to R23 569) ×SA withstands global downturn ×Robust financial institution; and ×Moderate external debt ×Current world economic impact on SA ×Driving away potential & existing investors Investors become more risk averse move assets from emerging markets to safer investment environments × Slowdown in global demand Rand will experience a prolonged depreciation ×E.g. Slowdown in Chinese economy (larger trading partner) ×Cost push inflation(food and oil prices ) negative impact on SA economy ×New member of BRICS ×SA ranked amongst the best in the world in; Financial sector, strength in reporting & auditing standards, protection of investors rights Large sized economy SA and the global economy SA links with global economy and global downturn SA as part of the BRICS Global factors affecting SA economy SA’s economy’s performance since democracy (1994 to 2010)
Where are we now? Europe's financial crisis Affects world economic growth Continues to way down financial markets and hamper global growth South Africa’s impact on the financial crisis Strong links to the euro zone ( largest trading partner) Financial crisis has decreased demand for goods Driven away potential and existing investors Europe will take long to recover, SA would have to change focus to trade with china and India
Where are we now? A challenging environment Structural changes seen in SA Significant shift towards service sectors, major contributor to GDP Finance, real estate and business services sector grown from 16% to over 20% of GPD Decline in the role of mining and agricultural sectors 12% of the country is suitable for planting crops rethink approach to agriculture to improve food security Hold worlds largest reserves of gold, platinum, chrome ore and magnesium ore ActualEstimateForecast 20102011201220132014 Final household consumption220.127.116.11.84.2 Final government consumption18.104.22.168 Gross fixed capital formation-22.214.171.124.56 Gross domestic expenditure126.96.36.199.24.9 Exports4.5188.8.131.52 Imports184.108.40.206.18.3 Real GDP growth220.127.116.11.64.2 Headline CPI inflation4.318.104.22.168
Where are we now? South African competitiveness relative to peers Competit iveness ranking to peers Overall ranking 4 th Institutio ns 1st Infrastru cture ranked 5 th Health and primary education 9th Labour market efficienc y 8 th Macro environ ment 6 th Market size 9th
Where are we now? South African competitiveness relative to peers Ineffective Government bureaucracy Inadequate Educated workforce Restricted Labour regulations CorruptionCrimeTheft SA Problematic factors for doing business Positive impact on FDI’s Strengths Weakness
Where are we going? Tackling unemployment, poverty and education Unemployment Unemployment rate dropped from 31% (2005) to 23.9% (2011) Two key trends Discourage work seekers, High rate of youth unemployment, 71% of unemployed are aged between 15-34 years. Education Poor quality of education Literacy and numeracy test scores remains low by African and global standards Government dedicates 6% of GDP to education SA’s teachers are amongst the highest paid in the world Poverty SA considered an under- middle income country 39% of population lives under the poverty line of R418 per person per month Governments plan NPC plans to reduce the number of people living under the poverty line to zero by 2030 Create 11 million jobs in 20 years Improve education system
Where are we going? Investor concerns Investors have ranked the impact of government bureaucracy, the inadequate skills of the work force, South Africa’s restrictive labour legislation, corruption and crime and theft as their most significant concerns and impediments for doing business in South Africa. South Africa is seen as a country with low levels of labour market efficiency SA ranked amongst the worst in the world when considering the rigidity of our hiring and firing practices. Foreign investors are concerned with the lack of flexibility that exist with regard to companies’ ability to determine wages and the tensions that exist with labour unions. Investors also indicate that the relatively poor health of our labour force is a worrying factor when they consider investments in the country. Although our infrastructure seems to be in a relatively good condition if compared to the rest of Africa, investors are worried about infrastructure maintenance and are of the opinion that our infrastructure needs upgrading. The poor security situation and the impact and cost of violence and crime for business are a cause for concern and we are ranked amongst the worst in world on this aspect.
Where are we going? The New Growth Path Six priority areas to job creation 1. Infrastructure development 2. Agriculture 3. Mining 4. Manufacturing 5. The ‘green’ economy 6. Tourism Policy direction A comprehensive drive to enhance both social equity and competitiveness Systemic changes to mobilise domestic investment around activities that can create sustainable employment Strong social dialogue to focus all stakeholders on encouraging growth in employment-creating activities. IPAP 2 Sets out objectives as well as ways to promote a more labour absorbing industrialisation path in order to combat the country’s unemployment problem and to increase the participation of historically disadvantaged people and marginalised regions in the core of the industrial economy. IPAP2 is “a radical shift to grow a developmental economy by taking deliberate decisions to ensure that investment targets production sectors of the economy and to arrest the decline in manufacturing and accelerate skilled employment creation.”
Where are we going? The State of the Nation Address, 2012/13 Budget and the MTEF The NDP highlights the following 9 key issues within the South African economy Job creation Infrastructure expansion Transition to a low carbon economy Transformation of urban and rural spaces Education and training Providing quality health care Building a capable state Fighting corruption Transformation and unity 5 major infrastructure programmes Geographically- focused Integrated approach Mining, transport & agriculture R4.8 billion was allocated to expanded public works programme and the New Jobs fund that began operating in June of 2011, received over 2500 applications and committed over R1 billion in allocations to various projects.
Where are we going? The State of the Nation Address, 2012/13 Budget and the MTEF Government is taking some steps to improve the conditions for investors Government aims to support both the Industrial Development Zone (IDZ) and Special Economic Zones (SEZ) Government allocated R2.3 billion of the R15.8 billion to economic services and environmental protection to the IDZs and SEZs. Tax proposals (R/m) 2012/13 Personal income tax -4 300.00 Business tax -6 350.00 Property tax Indirect tax 8 342.00 National budget revenue after tax proposals 904 830.00 Consolidated Budget2011/122012/13*2013/14**2014/15** R million Total receipts830 210904 830 1 005 871 1 118 183 Total payments 972 54710583211 149 1251 239 699 Budget balance -142 337-153491-143 255-121 156 % of GDP-4.8%-4.6%-4.0%-3.0% Budget balance as % of GDP
The challenging global economic environment translates to a significant slowdown in demand from developed economies, directly affecting developing and export markets the world over. Prudent macroeconomic policies should be followed by different countries to ensure a stable, albeit slow, road to recovery of the global economy. Although South Africa has made significant progress since becoming a democratic country 18 years ago, structural inefficiencies must be addressed in order to stake a claim as a competitive developing economy on the world stage.