Economic Thoughts: Challenging 2016 Risks

For a while it looked as if the Fed was going to be our main 2016 risk (and Zuma our main headache). How quickly things change (and doubtlessly will keep shifting). What will be our main disrupters in 2016?


We are now being devoured by devastating drought, Chinese equity and currency market instability are roiling global markets anew (replay of August and September 2014 events), the intensifying Shia-Sunni (Iranian-Saudi) tensions are reinforcing a larger radicalising footprint, Europe is encountering new existential challenges (migrants, intolerance, political withdrawal), America is witnessing banal presidential election politics, the Fed is traversing a minefield. And Zuma’s clashing paradigms are keeping our business confidence and activity suppressed. 


The Middle East and European tensions could be a two to three year play. The American concerns are continuous but may not be the main disrupter (but no guarantee given). The immediate reality abruptly intensifying by the day is our drought. China may be a repeat of August last year (financial overreach being corrected, but novices making things worse than they need be, with the greater system changing direction and the means in place to guide it, but accompanied by equity and currency undershoot corrections spilling worldwide).


This makes China a major disturbance (in the sense of a very heavy financial market indigestion working itself out) but probably not lethal (triggering a major recession crisis) , Saudi-Iran lethal (in the sense of geopolitical conflict potential) but on a very uncertain time horizon, Europe a drifting squabble in search of new inner direction, America a political embarrassment (politicking) but its economy and the Fed far more stable than imagined.


China is experiencing sluggish growth and large capital outflows depreciating its currency. Its stock market contains a lot of novice investors, many wanting out at all costs, thereby also creating (unwanted) “technical” pressure for its currency. Policy intervention (stock market circuit-breakers) have boomeranged, making things worse, and are now being discontinued. Policymakers are looking to stabilise equity markets (a falling knife?) while having the means to steer the economy. Market overreaction, spilling worldwide, appears very considerable.


The Fed may be inhibited by Chinese events (and MidEast unrest) causing undershoot in US equities and Dollar overshoot (and a heavy dose of safe haven favouring still coming, focusing on its long bond yields?). Speculation is rife that the number of Fed rate rises this year may be more than one but less than four (undershooting its projected trajectory). The Fed and US economy are not a source of disturbance but are responding to disturbances elsewhere.


Don’t forget about the world. It is pummeling our equity prices, impacting the Rand heavily, hogging the evening news, making you poorer and making you pay more for many things. But none of it likely lethal in time when the fog clears.


Instead, it is the drought that aggressively looms ever larger. If the country could enjoy the kind of rains that doused the south Cape, things may change overnight. But with inland temperatures high for months this summer, and soaring anew into the high 30s and low 40s, the reality of a major disaster is upon us.


This will change growth prospects, lowering these drastically this year. It will boost inflation. And there will be more formal job losses.


Further Rand weakness will be imposed from the outside on the back of Chinese strains, Fed uncertainty, Middle East eruptions. And yet further bolstered by our ungoing lack of domestic policy focus, sliding performance, questions about fiscal stabilisation and doubtful credit ratings.


It suggests a Rand heading deeper into 16-18:$ territory.


Inflation will likely be kept modest by global oil price declines but may be heavily boosted by food price disruptions, CPI this year reaching well above 6% but core inflation ironically nearer 5%.


Growth used to be 3.5%, then became 2.5%, then 1.5% and is now on skids. The coming year could be negative. Non-farm GDP growth perhaps still positive, if only just, but overall laid low by drought.


That is a very negative outlook. With all the surprise potential to the downside? As to any turning points this year, like you I will be hoping that something will turn up, but it may be best to be very realistic about 2016.


It couldn’t be a worse possible time to hold local elections? That will favour some, penalise others, continuing the realignment of recent years?


They wouldn’t allow us a fast-forward to 2017, would they? Pity, one wants to get beyond these disrupters, see the global commodity cycle turn, get clarity on the Zuma succession, get beyond the drought.


But first we have to munch through 2016. At least it shouldn’t be as bad as 1916, with any luck. Then again, one starts to wonder.