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Global Economic Review and Outlook: Implications for South Africa 4th Congress of the Public Sector Economists’ Forum, 28-30 November 2012, Golden Gate Hotel Key messages •The global economic crisis has not eased. •Global growth momentum has moderated: uncertainty and vulnerabilities, particularly with respect to public finances continues to exert further downside risks to global growth prospects. •The negative effects of fiscal consolidation and austerity is further compounded by the deleveraging process and regulatory reforms globally •Negative spillover effects through financial market volatility and the trade channel are expected to remain at heightened levels. •Nonetheless, persistent negative output gaps have helped in softening inflationary advanced economies, although occasional spikes in international food commodity prices, oil prices and and volatility in exchange rates for most emerging market economies pose further challenges and complicate policy formulation. •Most central banks (both in advanced and emerging market economies have eased monetary policy using a combination of conventional and unconventional monetary policy tools. Risks to global outlook remain tilted to the downside World GDP growth 7 6 5 4 3 90 percent confidence interval 2 90 percent confidence interval from April 2012 WEO 1 Baseline forecast 0 -1 2009 2010 2011 2012 2013 Risks to global outlook remain tilted to the downside Risks to global outlook remain tilted to the downside Revisions to GDP growth projections (percentage points) 0.2 0 -0.2 -0.4 -0.6 2012 -0.8 2013 -1 -1.2 Forecasted growth remains weak, especially in Europe Evolution of real GDP forecasts for 2012 for the G-7 and euro area Growth prospects are affected by the fiscal cliff in US and recession in Europe Slowing growth in EMEs pose a threat to global growth outlook Percentage change from quarter to quarter (saar) Percentage change from quarter to quarter (saar) 9 • Global growth has been underpinned by developments in EMEs. • Recent slowdown in EMEs has taken its toll on world growth. • The BRICs have been an important driver of world growth. • Current projections are that growth will be subdued in 2013 with a moderate pickup in 2014. 8 7 6 5 4 3 2 1 0 10Q1 10Q2 10Q3 10Q4 11Q1 Developing Asia Latin America Emerging Europe & CIS Emerging markets 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 2017* 2016* 2015* 2014* * Forecasts 2013* 12Q3 12Q2 12Q1 11Q4 11Q3 11Q2 11Q1 10Q3 2017* 2016* 2015* 2014* 2013* 12Q3 12Q2 0 12Q1 0 11Q4 1 11Q3 1 11Q2 2 11Q1 2 10Q4 3 10Q3 3 10Q2 4 10Q2 5 4 10Q1 Advanced countries Emerging economies (excl. BRICS) BRICS Global growth 10Q4 EME Advanced countries Global growth 5 Percentage change from quarter to quarter (saar) 6 10Q1 6 US 9 US growth outlook remains subdued • US economy grew by 2 per cent in Q3 • Leading indicators suggest a subdued growth performance well into 2013. • US fiscal cliff and removal of debt ceiling remain the key binding constraints to US growth prospects. Euro Area 11 Key indicators for the Euro area Growth outlook remains tepid with PMI below the neutral 50 mark for the past 15 months. • Index Percentage change over 12 months 10 5 55 -2.8 50 -5 45 -10 Labour market conditions continue to deteriorate. • Economic sentiment indicator has also declined in most of the EA countries. • 120 40 35 -20 -25 30 2006 2007 2008 2009 2010 2011 Industrial production (excluding construction) Purchasing Managers Index (RHS) 12 110 11 100 10 90 45.4 -15 Economic Sentiment Index Per cent 11.6 9 80 8 70 7 60 2005 2006 Greece Portugal 2007 2008 Germany Spain 2009 2010 Italy Euro area 2011 65 60 0 Consumer confidence remains depressed. • 15 2012 6 2007 2008 2009 Euro area (17) unemployment rate 2010 2011 2012 Japan 13 Japan growth prospects • Japanese economy contracted in Q3 with a sharp decline in PCE and investment. Percentage points Index 15 110 10 100 5 91.7 0 80 -3.5 -10 -15 70 -20 60 -25 -30 2007 2008 2010 2009 Private Investment Exports Government Consumption Real GDP growth (saar) There is a strong possibility that the economy could enter a recession in the next quarter. 50 2012 2011 Change in Inventories Imports Private Consumption Composite Leading Indicator (RHS) Japan Trade Balances with major partners, JPY Billions (6-months normal averages, NSA) 1000 900 800 700 600 500 400 300 200 100 Trade with the US Intra-regional Trade Trade with Europe Jun/2012 Dec/2012 Jun/2011 Dec/2011 Jun/2010 Dec/2010 Jun/2009 Dec/2009 Jun/2008 Dec/2008 Jun/2007 Dec/2007 Jun/2006 Dec/2006 Jun/2005 Dec/2005 Jun/2004 Dec/2004 Jun/2003 Dec/2003 Jun/2002 Dec/2002 Jun/2001 0 Dec/2001 • Leading indicators point to a continued slowdown in the forecast horizon. -5 Jun/2000 • In addition, slowdown of external sector poses a major challenge to growth prospects. Dec/2000 • 90 BOJ: Measures aimed at overcoming deflation and stimulating growth BOJ has introduced new measures to stimulate PCE and hence address the problems of deflation and low growth. • Negative output gap expected to persist for next four years and deflation is likely to continue for much longer than projected by the BOJ. • Players Interventions BOJ- lends unlimited amounts at low interest rate to financial institutions through the newly established “Bank Facility Lending” and the Asset Purchase Program (JGBs, TBs etc.) . Commercial banks- The full amount acquired Transmission 4.0 All economic agents (government, BOJ, financial institutions, businesses and the households) Per cent through the BOJ lending facility is made available to economic agents at lower lending rates. 2.0 0.0 The low lending rate induces increased credit appetite by households and -2.0 Desired results -4.0 businesses. More liquidity results in increased production and consumption provided no -6.0 hoarding and postponed consumption 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -8.0 Output gap % of potential GDP Inflation, average consumer prices occurs. Higher consumption revives consumer prices and the desired CPI inflation of 1% is attained. Some issues in EMEs 16 China growth prospects QB March 2011 • Economic slowdown a major concern or has the economy bottomed out? • Recent high frequency indictors show that economy may have bottomed out. • Estimates indicate that China will return to potential (8.5%) in the second quarter of 2013. • There is mixed assessment about the impact of the political leadership change on Chinese economic prospects. China: Slowdown still a concern? 45 per cent 14.0 Percentage change over twelve months 40 13.0 35 12.0 30 11.0 25 10.0 2013/06/01 2012/07/01 2011/08/01 2010/09/01 2009/10/01 2008/11/01 2007/12/01 2007/01/01 2006/02/01 2005/03/01 2004/04/01 2003/05/01 2002/06/01 2001/07/01 2000/08/01 5 1999/09/01 6.0 1998/10/01 10 1997/11/01 7.0 1996/12/01 15 1996/01/01 8.0 1995/02/01 20 1994/03/01 9.0 0 2006 2007 2008 2009 2010 Fixed Asset Investment: Construction and installation (rhs) Fixed Asset Investment: Purchase of Equipment (rhs) Fixed Asset Investment: Other (rhs) percentage change over a year ago index 70 25 60 20 Percentage change over a year ago 35 30 25 20 50 15 15 10 40 10 5 0 30 2007/01/01 5 2008/01/01 2009/01/01 PMI (output) 2010/01/01 2011/01/01 Industrial Production (rhs) 2012/01/01 Retail Sales 2011 India • There has been a deceleration in economic growth since the beginning of 2011. • Major policy concerns include the rising current account and fiscal deficits. • The projected weak external environment and deceleration in domestic activity will put further pressure on the current account and fiscal deficit positions? WEO GDP PROJECTIONS 2012 Percent change 9 Percentage change over a year ago 10.0 Index 9.0 8.0 65.0 8 60.0 7 6 55.0 5 7.0 50.0 4 5.0 45.0 3 4.0 40.0 2 2007/03/31 2007/06/30 2007/09/30 2007/12/31 2008/03/31 2008/06/30 2008/09/30 2008/12/31 2009/03/31 2009/06/30 2009/09/30 2009/12/31 2010/03/31 2010/06/30 2010/09/30 2010/12/31 2011/03/30 2011/06/31 2011/09/30 2011/12/31 2012/03/30 2012/06/31 2012/09/30 2012/12/31 6.0 Real GDP growth (year-on-year) 1 0 2012 2013 JULY Purcahsing managers index (rhs) 50000 40000 40000 0 30000 30000 -1 20000 20000 -2 10000 10000 -3 0 -4 -10000 -10000 -5 -20000 -20000 -6 -30000 -7 0 2001 2002 2015 2016 2017 OCTOBER India Fiscal Deficit US dollar million 50000 -30000 2000 2014 2003 2004 2005 2006 Trade Balance (rhs) 2007 2008 Imports 2009 2010 Exports 2011 2012 Percentage of GDP 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Fiscal Deficit India: Inflationary pressures • • • 12 While inflation has declined during 2012, inflationary pressures remain elevated. Inflation outcomes are now expected to be higher than initial estimates. Rise in projected inflation presents a monetary policy dilemma? Percent Percentage contribution 12 Per cent 10 10 8 7.5 6 4 4 2 2 0 0 -2 -2 -4 -4 2009 2011 2010 2012 Other Fuel and Power Food Wholesale Price Index (percentage change over twelve months) (rhs) Per cent 18 16 14 8 12 10 6 8 6 4 4 2 0 2 -2 -4 0 2012 2013 2014 JULY 2015 OCTOBER 2016 2017 8 6 WEO CPI PROJECTIONS 2012 10 12 2007 2008 2009 2010 2011 Wholesale prices (percentage change over twelve months) WPI less food WPI less food and energy 2012 Brazil: Slowing growth a major concern Has been a significant economic slowdown in Brazil. • 14 10 The deceleration in PCE has been a major factor underpinning the slowdown. • 6 2 -2 The deceleration in the credit impulse been a major constraint to the pickup in retail sale spending? • -6 -10 -14 -18 The reduction in policy rates has had limited impact? • 80 Percentage change from quarter to quarter (saar) 2007 Real GDP growth Per cent 140 70 120 60 100 34.1 50 2010 2009 2008 2011 PCE Per cent, yoy (3mma) Per cent, yoy (3mma) 80 60 40 40 30 20 20 7.5 10 0 -20 0 2003 2004 2005 2006 2007 Interest Rates, Discount Rate 2008 2009 2010 2011 2012 -40 2007 2008 2012 2009 2010 2011 Interest Rates, Lending Rate Credit impulse Retail sales (rhs) 2012 13 12 11 10 9 8 7 6 5 4 3 World Trade 22 World trade has deteriorated in recent months • • World trade volumes have declined in the most recent month mainly as a result of a sharp slowdown in EMEs trade. 50 Percentage change* 40 30 20 1.3 5.5 10 0 South African export performance has been very poor by international standards. -0.4 -10 -3.2 -20 -30 -40 • 250 Constant market share analysis shows that South African export producers are loosing market share in both advanced countries and EMEs. -50 -60 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 * Annualised % change of 3-months moving average over previous 3-month moving average - seasonally adjusted World trade volume World (average from 2000) Advanced economies (Exports) Emerging economies (Exports) Index: 2000=100 Index: 2000=100 275 250 200 225 200 175 150 150 125 100 100 75 50 50 25 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Advanced economies EME & developing countries Potential AE Potential EMEs 2011 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 World exports Advanced economy exports Emerging economy exports South Africa export volumes Commodity prices 24 Oil prices have declined but remain at elevated levels 160 • Oil prices have declined in recent months. US dollar per barrel 140 120 100 • While geopolitical risks persist, the oil market remains well supplied. 80 60 40 20 34 Million barrels per day 3.4 32 30 30 28 28.7 26 24 22 20 2007 2008 2009 Iraq production OPEC production (excluding Iraq) OPEC production quotas 2010 2011 2012 Jul 13 UK Brent crude oil price West Texas Intermediate (WTI) UK Brent crude futures West Texas Intermediate futures Oct 13 Apr 13 Jan 13 Jul 12 Oct 12 Apr 12 Jan 12 Jul 11 Oct 11 Apr 11 Jan 11 Jul 10 Oct 10 Apr 10 Jan 10 Jul 09 Oct 09 Apr 09 Jan 09 Jul 08 Oct 08 Apr 08 Jan 08 0 International food prices • The IMF and World bank food price indices have declined in recent months. 240 Index: 2005=100 214.3 220 • Global food markets are vulnerable to supply setbacks because of low buffers. 200 182.0 180 • • 80 Stock-to-use ratios remain below their longterm historical average levels for some of major commodities. 140 120 Is a strong lagged correlation between international food prices and SA food inflation. 100 FAO Food Price Index Exchange rate impacts could exert the major influence on SA food inflation trends? Annual percentage change 178.5 160 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 • IMF Food Price Index World Bank Food Price Index Global food stock-to-use ratios (inventories as a per cent of global consumption) 50 Rand terms 22 45 40 60 18 40 14 20 10 25 0 6 20 -20 2 -40 -2 2007–08 average Estimated 2012 (April WEO) Estimated 2012 (September) 1981–2011 average 35 30 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 15 Average world food price index SA Food price index 10 5 0 Corn Rice Wheat Soybeans Other grains and oilseeds Some policy considerations 27 Monetary policy remains accommodative • • • • Growth concerns have prompted a further loosening of monetary policy in some advanced and EMEs. However, monetary policy has had a limited impact on PCE in many countries? Lingering output gaps and well anchored inflation expectations have kept inflationary pressures in check. Growth considerations will be the major monetary policy concern for some time to come. Net change since previous SARB MPC Latest CPI inflation and direction of change 1 Jan 08 13 Nov 12 Euro Area 4,00 0,75 0 2,6 Japan* 0,50 0,05 0 -0,3 UK 5,50 0,50 0 2,7 USA** 4,25 0,125 0 2,0 Australia 6,75 3,25 -0,25 2,0 4,25 8,25 11,00 1,00 2,50 5,00 0 0 … 1,2 0,8 5,5 Denmark Israel 4,25 4,25 0,00 2,00 0 -0,25 2,3 2,1 Norway Sweden Switzerland*** 5,25 4,00 2,75 1,50 1,25 0,00 0 0 0 1,1 1,0 -0,2 Hong Kong 5,75 0,50 0 3,8 5,00 3,375 2,75 1,875 0 0 2,1 2,4 China 7,47 6,00 0 1,7 India Indonesia Malaysia Thailand 7,75 8,00 3,50 3,25 8,00 5,75 3,00 2,75 0 0 0 0 9,8 4,6 1,3 3,3 Brazil Chile Mexico 11,25 6,00 7,50 7,25 5,00 4,50 -0,25 0 0 5,5 2,9 4,6 Czech Republic Hungary Poland Russia 3,50 7,50 5,00 10,00 0,25 6,25 4,50 8,25 -0,45 -0,50 -0,25 +0,25 3,4 6,0 3,8 6,5 Canada New Zealand South Africa South Korea Taiwan Turkey n.a. 5,75 0 7,8 14,50 9,50 0 7,1 8,75 11,00 -2,00 5,3 Lesotho**** 13,10 9,40 -0,06 5,3 Namibia 10,50 5,50 0 6,7 Zambia***** 13,20 9,25 +0,25 6,6 Botswana Kenya Latest monetary policy decision 0 8/11/12 0 30/10/12 0 8/11/12 0 24/10/12 0 6/11/12 0 0 0 23/10/12 25/10/12 20/09/12 -0,25 -0,25 5/07/12 29/10/12 0 0 0 31/10/12 25/10/12 13/09/12 0 25/10/12 0 0 09/11/12 22/03/12 -0,31 07/07/12 0 0 0 -0,25 30/10/12 08/11/12 06/09/12 17/10/12 -0,25 0 0 10/10/12 18/10/12 29/10/12 -0,20 -0,25 -0,25 0 1/11/12 30/10/12 7/11/12 9/11/12 0 18/10/12 0 23/10/12 -2,00 7/11/12 -0,03 31/10/12 0 24/10/12 +0,25 31/10/12 Implications for domestic economic developments and growth outlook Rand weakness, influenced by domestic factors, are negative for inflation Exchange rates of the rand Exchange rate performance against the US dollar The WGBI and global monetary easing supported bonds while domestic economic developments negatively affected shares Non-resident net purchases of domestic securities and risk aversion Domestic share prices scaled new highs Domestic share price indices International share price indices* International crude oil prices and the exchange rate impacts the petrol price and inflation and weakens growth prospects Price of Brent crude oil The oil burden and economic growth in South Africa South African petrol price International agricultural prices and drought impacted domestic food prices Food price inflation Selected commodity prices Spillovers affected exports Business cycle spillover indices The Bank’s growth forecast have been revised lower…3rd quarter growth outcome on the low side of expectations Real GDP growth forecast All short-term indicators show an expected moderation in domestic economic activity Domestic economic sentiment indicators Historic range Most recent As at MPR:* Low High Low High May 2012 Oct 2012 10 91 23 55 52 47 11 93 11 51 47 33 0 94 35 63 61 46 11 89 23 38 34 26 35,3 63,4 48,2 57,9 53,7 46,2 -33 23 -6 15 5 -1 RMB/BER Business Confidence Index BER Manufacturing Confidence Index Ernst & Young/BER Retail Confidence Index FNB Building Confidence Index Kagiso/BER Purchasing Managers Index FNB/BER Consumer Confidence Index * Improved/Worsened since previous MPR Sources: Kagiso Securities, Rand Merchant Bank (RMB), FNB, Ernst & Young and the Bureau for Economic Research (BER), Stellenbosch University Assessment and conclusion QB March 2011 Global and domestic growth prospects • The global financial crisis created fiscal and monetary policy challenges • Consensus among economists is that global growth is still far from returning to higher sustainable rates • Latest forecasts across major institutions suggest global momentum slowing and have prospects revised downwards growth • Economic prospects for both advanced countries and EMEs have deteriorated recently and uncertainty weighs heavily on the outlook for the global economy. • The euro area and Japan faced increased probability of entering a recession. • Fiscal policy concerns still dominate in the US and euro area. QB March 2011 Domestic • Negative spill-over effects both from the financial and exports channel remain at elevated levels and pose challenges to policy makers. • Volatility in capital flows, equity prices, the exchange rate and terms of trade (commodity prices) are evidence of financial spill-overs. • Slowdown in exports and the domestic share of global exports is further evidence of real economic spill-overs. • Recent sovereign ratings downgrades and the possibility of further downgrades is evidence that policy makers need to remain vigilant with respect to the domestic fiscal affairs QB March 2011 End Questions QB March 2011