Global Economic Overview: GDP Growth, Manufacturing PMI, and Equity Market Movements

Recent trends in and outlook for

the Global and South African economies

The Chemicals Value Chain Roadshow

Port Elizabeth

9 March 2016

Nico Kelder

Department of Research and Information

Global economy

Global economy:

World growth decelerated in 2015

•

The global economy faced numerous headwinds in 2015,

including macroeconomic uncertainties, lower

commodity prices, currency and equity market volatility,

slower growth in China, deflation risks, as well as

uncertainty about US monetary policy tightening.

•

Subdued global growth recorded in 2015 (slowest rate in

post-crisis period) as growth in emerging markets moved

to a lower gear, whereas advanced economies reported a

very modest uptick in their expansion rates.

•

Sub-Saharan Africa was one of the most affected regions,

as growth slowed to 3.5% in 2015, from 5% in 2014. This

largely due to adverse developments in commodity

markets, but weaker domestic demand also played a

role.

•

Brazil and Russia faced deep recessions in 2015 and their

growth outlooks remain dire for 2016.

•

China’s economy continued on a decelerating growth

path to its lowest expansion rate since 1990.

•

Global growth prospects are set to remain unsatisfactory

in 2016, with the World Economic Climate Indicator

pointing to downside risks across various regions and

countries.

Global economy:

Manufacturing showing mixed performance

•

Global Manufacturing PMI continued on its declining trend

in December 2015, reaching a 3-month low, recovering

marginally in January.

•

The average PMI for 2015 was lower than the PMIs for both

2013 and 2014.

•

Manufacturing output in the US is taking strain, with the

Jan. 2016 PMI being 10% lower than a year earlier.

•

Operating conditions in China’s manufacturing sector

deteriorated through 2015 and into 2016.

•

Eurozone saw its manufacturing conditions improve in

2015 – the PMI in Dec. was the highest since April 2014.

Global economy:

Equity markets tumbled sharply at the start of the year

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Outlook for the global economy:

Modest uptick in economic growth

•

After stumbling in 2015, a modest uptick in global growth

is forecast by the IMF for 2016.

•

Growth in the US is expected to edge slightly higher

despite concerns over its export performance (due to a

strong US Dollar and subdued global demand), whilst its

industrial sector is taking some strain.

•

The Eurozone should benefit from stronger consumer

spending and easy monetary policy. This would outweigh

a weaker export performance.

•

China’s growth momentum is set to ease further over the

outlook period due to a moderation in investment activity,

with its manufacturing sector taking further strain.

•

Brazil and Russia will remain in recession in 2016, but

strong growth is anticipated for India.

•

Sub-Saharan Africa may experience slightly higher growth

(4% in 2016), but lower commodity prices will pose a drag

on many of the region’s economies.

•

Downside risks to global growth include geo-political

tensions, heightened equity market volatility, China’s

slower growth momentum, lower commodity prices,

substantial capital outflows from emerging markets, as

well as monetary policy tightening in the US (next Fed rate

hike expected in 2

nd

 half of 2016).

Outlook for the global economy:

IMF projections

South African economy

SA economy:

Economic growth sharply lower

•

SA economy’s growth momentum on a

decline over the past 4 years and

presently under immense pressure.

•

The weakness is sectorally widespread,

particularly in the goods-producing

segments of the economy.

•

Drought conditions impacted severely on

agricultural output during 2015, with a

contraction of 8.4% in its real GDP.

•

Manufacturing activity is still constrained

by weak demand conditions, among other

factors, with growth having stalled in

2014 and 2015.

•

The rebound in mining output (mainly

due to low base effects) should be short-

lived, with the outlook remaining bleak

over the short- to medium term.

•

Tight budgetary conditions due to a

revenue squeeze are being reflected in a

substantial growth moderation in general

government services.

Note: Figures in brackets refer to % share of GDP in 2015

SA economy:

Manufacturing sector under severe strain

•

SA’s manufacturing sector is taking severe

strain at present.

•

Output growth has stagnated in the past

two years (with 0% growth in 2015).

•

A combination of adverse domestic and

external factors are negatively affecting

manufacturing activity and investment

decisions.

•

General business conditions were very

challenging in 2015 and expectations are

that these may be even more so in the

current year.

•

Manufacturers have indicated that fixed

investment in machinery and equipment

will remain fairly subdued over the next 12

months.

•

Due to strong linkages with various

suppliers of goods and services, the

weakness in the manufacturing sector will

extend also into many other sectors in the

domestic economy.

SA economy:

Substantially lower share by manufacturing

•

After many decades as the single

largest sub-sector in the SA economy,

manufacturing’s share declined

sharply since the early 1990s.

•

The financial and business services

sector has overtaken it as the largest

sub-sector in 2002.

•

Manufacturing is now the fourth

largest sub-sector, with a nominal

share of 13% in overall GDP in 2015.

•

The manufacturing sector is faced by

increasing challenges in a more

competitive global trading

environment.

SA economy: Manufacturing sector trends

12

Business conditions are unsatisfactory at present and

could be deteriorating in 2016

Output remains below pre-crisis levels

Weak investment activity, whilst outlook worsened

Uptick in employment not likely to continue in 2016 as

growth outlook worsens

SA economy:

Chemical sector’s significance

Chemical sector 

plays an important role in the SA economy:

•

Contribution to national GDP in 2014 stood at 2.8%

•

Accounted for 21% of manufacturing output in 2015

•

Employs approximately 142 000 people directly

•

Value of exports in 2015 measured R121 billion, or 20% of all manufactured exports

•

Substantial export orientation, with the export propensity as follows:

−

Petroleum products = 22.9%

−

Basic chemicals = 54.9%

−

Other chemicals = 21.7%

−

Plastic products  = 18.5%

•

Business confidence remained at low levels throughout 2015, having measured just 24 index

points by Q4, being the lowest since Q4 2013.

•

Looking ahead for 2016, survey respondents (BER manufacturing survey) have indicated a sharp

drop in fixed investment in machinery and equipment for 2016.

•

Business conditions in 2016 are expected to remain largely unsatisfactory.

•

SA’s chemical industry  (Basic chemicals & Other chemicals) employed 77 300 people in 2014, whilst its own value

add (GDP) stood at R46.8 billion.

•

However, through its backward linkages with various suppliers of goods and services providers, the chemical

sector was ultimately responsible for approximately 540 000 jobs economy-wide, with overall GDP to the value of

R220 billion being associated with activities related directly and/or indirectly with this sector in 2014.

GDP multiplier = 4.72

Jobs multiplier = 7.00

SA economy:

Chemical sector – key demand drivers

SA economy:

Chemical sector – export and import intensities

•

Chemical sector has become increasingly focused on global markets as its export propensity rose sharply over time,

making the sector quite vulnerable to market developments around the globe.

•

Furthermore, the sector is facing increased import competition as the relative share of imports in domestic demand

increased strongly from around 23% in 2004 to 45% by 2014.

SA economy:

Chemical sector reporting growth moderation

•

Relatively subdued rates of growth have

been reported by the chemical sector in

more recent years.

•

This was particularly the case for the basic

chemical products sub-sector, with a

modest contraction in output levels

having been recorded in 2015.

•

The “other” chemical sector saw its output

falling in 2014, but rebounding again last

year.

•

For the chemical sector at large, it would

appear as if both domestic and export

sales took some strain in 2015, as general

business conditions have been

deteriorating (BER survey).

•

Rising cost pressures and insufficient

demand have been mentioned as being

constraining factors to do business.

SA economy:

Chemical sector challenges  & opportunities

Challenges

  include the following:

•

Poor logistical services and transport costs

•

Electricity supply constraints & costs

•

Unfavourable investment environment

•

Lack of sufficient skills in certain segments

of the industry

•

Insufficient demand

•

Rising operating costs

•

Increased import competition

Opportunities

  include the following:

•

Exports to rest of Africa (agro-, mining- and

industrial chemicals, speciality chemicals)

•

Weaker rand to increase price

competitiveness (improved export

performance)

•

Import replacement opportunities in

domestic market

SA economy:

Trade balance showing an improvement

•

SA recorded a trade deficit of R79 billion in

2015 (R121 bn in 2014), with its merchandise

exports having been under strain despite the

substantial currency depreciation.

•

Subdued global demand, low commodity

prices and a worsening domestic operating

environment, along with adverse climatic

conditions, have all impacted on the country’s

export performance.

•

Although exports of motor vehicles increased

strongly by 26% in nominal value terms to

R105 bn in 2015, the automotive sector at

large (including parts and accessories), still

recorded a trade deficit of R28 bn.

•

For the entire manufacturing sector the trade

deficit stood at almost R340 bn in 2015.

•

Despite a much weaker exchange rate, the

manufacturing sector still finds it extremely

challenging to increase its exports in a

meaningful manner.

•

Weak demand conditions in key export

markets (e.g. Europe and rest of Africa), but

also elsewhere in the globe, are adversely

impacting on manufactured exports.

•

Manufacturing exports are highly

concentrated with motor vehicles

(17.2% share) topping the ranks in

2015, followed by basic iron and steel

(11.4%).

•

Top-10 manufacturing sectors (as per

graph), out of a total of 120 sub-

sectors, accounted for 58% of total

manufactured exports in 2015.

•

Need to diversify the export basket,

both in terms of geographical

destinations and the product mix, to

make the country less vulnerable to

global developments.

•

SA to embark on a concerted and

coordinated initiative to promote our

exports into the rest of the African

continent as a platform to grow the

local manufacturing sector.

SA economy:

Manufactured export basket highly concentrated

•

The rest of the African continent has become an

increasingly important market for SA exports,

particularly manufactured goods.

•

By 2015, about 29% of total merchandise exports

were destined to countries elsewhere in Africa,

mainly within SADC.

•

SA’s trade surplus with Africa measured R176 bn

in 2015, compared to R107 bn in 2010.

•

Manufactured goods accounted for 87% of the

entire export basket to the rest of Africa. This is by

far the largest share compared to any other

leading destination for SA manufactured exports.

•

Noteworthy is the fact that 42% (or R254 bn) of

SA’s total manufactured exports to the world at

large were sold in other African markets in 2015.

•

Leading exports products include non-electrical

machinery and equipment (e.g. mining and

agricultural machinery); processed food; motor

vehicles & parts; other chemical products;

petroleum products; basic chemicals, as well as

fabricated metal products.

SA economy:

Africa has become a very important trading partner

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SA economy:

Exports of chemical products likely to be under pressure

•

The rest of the African continent accounts for a substantial share for all of SA’s chemical exports, with a share of 36%

and 65%, respectively, for basic chemicals and “other” chemicals.

•

Considering the fairly high export focus, particularly for the “other” chemical sector, some role players could find it

challenging to maintain their market share in key markets, such as the rest of Africa.

•

Although the US economy is forecast to expand at a fairly strong pace, its importance as a market is quite limited for

the “other” chemicals sector, but new market opportunities could be explored.

•

A better economic performance by the EU should also provide market development opportunities.

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•

Despite substantial weakness in the SA economy

during 2015, more jobs were created.

•

For the year as a whole, 698 000 new jobs were

added, the majority within the financial and

business services sub-sector (+ 234 000).

•

The community services sector (incl. government),

added 123 000 jobs, followed by the agricultural

sector (+ 118 000) and construction (+105 000).

•

The manufacturing sector, in turn, shed 11 000 jobs

in 2015, with its employment numbers at present

about 373 000 below the pre-crisis levels.

•

Employment levels in the private sector are currently

only 3.8% (+458 000 jobs) higher than in Q4 2008.

•

Unemployment levels remained very high at  24.5%

in Q4 2015, with 5.2 million people having been

unable to find work.

•

Subdued growth outlook for SA economy over the

short-term does not bode well for substantial

employment creation.

SA economy:

Inflation outlook is worsening – more rate hikes expected

•

Inflation was on an upward trend for most of

2015, averaging 4.6% for the year as a whole

and rising to 6.2% in January 2016.

•

Core inflation’s declining trend in 2015, has

been reversed in January 2016.

•

Items that reported higher prices during 2015

included municipal services (e.g. water,

sanitation and electricity), bread and cereals,

education, as well as household appliances

and tableware, among others.

•

Despite rising cost pressures, companies were

not able to pass on these higher prices to

consumers in light of subdued demand

conditions.

•

The inflation outlook has worsened quite

substantially in light of the persistent drought

and a significantly weaker Rand. CPI inflation

forecast to average 6.4% and 6.9% in 2016 and

2017, respectively.

•

Hence, the Monetary Policy Committee (MPC)

is likely to hike the repo rate by another 50

bps before year-end.

SA economy:

Low confidence levels prevail

•

Business confidence fell sharply throughout

2015 to 36 points by Q4 – the lowest reading

in almost 6 years.

•

More than 60% of survey respondents are

unhappy with prevailing business conditions.

•

Retailers’ confidence edged higher to a net

balance of 40 points in Q4 2015, after having

plunged to a 15-year low in Q3. This is

reflective of a very difficult consumer

environment.

•

More than 80% of all vehicle dealers are

unhappy about current economic conditions,

with Q4 2015 confidence levels at just 19

points, being at its lowest since the 2009

recession.

•

Low business confidence is indicative of an

extremely challenging economic environment

and operating conditions, therefore providing

little confidence of a speedy return to a higher

economic growth trajectory.

SA economy:

Economic outlook has worsened substantially

•

Economic conditions in SA have been deteriorating

over the past 2 to 3 years, with the downtrend

intensifying in 2015.

•

The SARB’s leading business cycle indicator has

dropped sharply since November 2014, from 98.3

index points to 93.5 by December 2015.

•

On a y-o-y basis, the leading indicator declined by

3.1% in December 2015, the 26

th

 consecutive

monthly decline.

•

Such a declining trend points towards very weak

rates of economic growth in the current year, a

situation which will be aggravated by severe

drought conditions.

•

The manufacturing PMI for January 2016 came in at

47.1 points, being the 7

th

 successive month below

the crucial 50-point mark 

(a PMI reading below 50

indicates a contraction and above 50 an expansion in

output).

•

Manufacturing conditions are likely to remain

challenging going forward as the index measuring

the expected business conditions in 6-months’ time

stood at a low of just 44.5 index points.

SA economy:

Economic forecasts: 

Household expenditure

•

SA households are taking strain, with growth in

consumer spending having decelerated sharply in

2015, from 2.4% in Q1 to 0.9% in Q3 (q-o-q).

•

High levels of indebtedness, a moderation in

disposable income growth, rising living costs (e.g.

electricity), higher personal income tax and other

taxes, as well as rising interest rates are impacting

on the ability and willingness of households to

spend.

•

Consumer confidence dropped sharply in 2015 (to a

14-year low in Q2), pointing to a low propensity an

willingness to spend in the current year.

•

The outlook is set to worsen substantially in 2016 as

higher food prices, rising interest rates, poor

employment prospects and the wealth effect of

adverse trends in certain asset categories (listed

shares, real estate) impact on consumers.

•

Growth in consumer spending is projected to slow

to a mere 0.3% in 2016, possibly edging higher to

1.2% by 2017.

•

Spending on durable goods (e.g. motor vehicles,

furniture) is expected to contract in 2016/17.

SA economy:

Economic forecasts: Fixed investment

•

Fixed investment activity is forecast to contract by

0.7% in real terms in 2016 and to remain weak in

2017/18, gaining momentum thereafter.

•

Real capital outlays by public corporations is

expected to fall in next 3 years.

•

Fiscal restraint is likely to result in a slowdown in

capex spending by general government in 2016

and 2017.

•

The private sector is expected to be very cautious

in its investment plans. Factors impacting on

investment decisions include a challenging global

and local economic environment, spare

production capacity across various industries,

rising operating costs, as well as policy uncertainty

in sectors such as mining and agriculture.

•

The adverse drought will have far-reaching

implications for various sectors of the economy,

impacting on investment activity.

•

Manufacturers have indicated that business

conditions are likely to remain very difficult

throughout the current year.

SA economy:

Economic forecasts: GDP growth

•

SA’s GDP growth performance decelerated further in

2015 to 1.3% (from an already poor 1.5% in 2014), and

its prospects have worsened substantially.

•

The impact of the drought will be widespread, while

key sectors such as mining and manufacturing are

expected to continue posting poor rates of growth,

particularly in 2016.

•

The consumer environment remains extremely

challenging in light of stretched household budgets

and a worsening outlook for inflation and interest

rates.

•

Exports are expected to remain under pressure in

2016 as growth and the structure of import demand

in key foreign markets will be less satisfactory (e.g.

rest of Africa) or largely unsatisfactory (e.g. China).

•

Business and consumer confidence is low and

infrastructure constraints, especially electricity

supply, and to a lesser extent transport & logistics, will

continue to impact on investment decisions in

2016/17.

•

GDP growth for 2016 is forecast at 0.4%, implying a

year of stagflation 

(low growth and high inflation)

.

Thank you

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