Insights into SA’s low growth, inflation pressures and labour market struggles

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CIARAN RYAN: What a strange and volatile year it has been. Oil prices are swinging wildly. There are renewed tensions in the Strait of Hormuz, and the knock-on effects are felt everywhere – from supply chains to household budgets.

At home, South African inflation is creeping higher. The economy continues to plod along, and the much-anticipated recovery under the government of national unity is yet to materialise.

This all sounds very familiar, doesn’t it? There’s a lot to unpack here, and who better to help us understand it than Adriaan Pask, chief investment officer at PSG Wealth.

Hi Adriaan, it’s great to talk to you again. Let’s start with the global picture. Strip out some of the noise for us and give us your take on the current backdrop to all of this – particularly the oil volatility and the geopolitical tensions I just mentioned.

ADRIAAN PASK: Yes, I think the picture really is quite mixed. From a global economy perspective, it is still expanding on aggregate, but the pace is definitely slower and a lot more uneven than we’ve experienced in previous years.

If we look at some of the business surveys, the PMIs [purchasing managers’ indices], these still signal towards an expansion overall, but there are definitely areas that look more vulnerable.

The Euro area in particular looks quite vulnerable; the US is looking better; and on China’s front, it looks like things are okay, but we shouldn’t be surprised if we see some stimulus in that environment.

Also, we always talk about the US labour market because that’s really such an important thing from a US consumer spending perspective – which drives so much of the global sentiment as well.

But what we have obviously seen is that payroll growth is smaller. It’s not running at the high expectations. We’ve seen hiring slow earlier – first in government hiring and now in the private sector, which is a bit more of a concern.

So the economy in the US is definitely not as robust as it was. But, that said, the data is still definitely not pointing very clearly to an imminent global recession or anything of that nature, I think.

You mentioned some of the volatility in the introduction, and I think that really is just evidence of the amount of uncertainty that we have seen. We’ve seen it in gold prices this year being very volatile; we’ve seen oil prices being volatile; and we’ve seen currencies being volatile.

That speaks to an economy that’s really dealing with a very mixed picture that seems to be evolving quite quickly.

That all being said, we’ve seen softer oil prices – though just this [past] week we’ve seen higher oil prices again with tensions being renewed.

But at least the oil prices aren’t anywhere near where they used to be earlier this year, which is a more supportive backdrop for the global economy, but for emerging markets in particular – and specifically for South Africa, given that we do import quite a bit of oil.

CIARAN RYAN: I’m glad you mentioned that it doesn’t look like we’re heading into recession, but maybe just talk about the South African picture now, the macroeconomic situation, and compare that to where the global economic picture stands.

ADRIAAN PASK: I think the South African economy story is somewhat frustrating, as would be familiar to most people.

We seem to be stuck in this lull of a low-growth environment. The growth is still positive, but it’s frustratingly low.

It’s definitely not strong enough to feel convincing for most households or businesses. I think the best way to probably describe it is that we’re still going through a somewhat fragile recovery, rather than any strong recovery.

But there are still some genuine cyclical improvements that we do see in some of the data. We can see, for example, car sales and credit extension are ticking higher.

And it doesn’t seem – although on the ground it does feel very different – like the consumer is under enormous stress from a balance-sheet perspective.

So, if we look at disposable income, that’s actually increasing and the debt is not out of control. That’s at least positive. But I definitely think the overall sentiment is not great.

If you speak to the average South African out there at the moment, they would suggest that we are in struggling territory, not growth territory.

CIARAN RYAN: What’s the inflation picture for you, and what does that mean for interest rates and ultimately, I guess, for the South African consumer as we’re heading towards the second half of the year?

ADRIAAN PASK: I think inflation, and with that obviously the interest-rate discussion, is so interesting. But again, it’s something that evolves so quickly.

The oil price is a massive instigator in the story. Obviously, we’ve seen oil prices come down, and initially that looked very positive. But we still need to keep in mind that oil prices could accelerate.

We’ve more recently seen tensions move higher, as I mentioned before. And we need to keep in mind any second-round effects that come through.

It’s not really very common for prices on the ground to move higher because of high input costs like oil. Typically, even if the oil price comes down, prices tend to be a little stickier.

Consumer prices do remain high. And I think that’s really one of the risks that you face on the inflation front.

At the same time the Reserve Bank has signalled that they want to take a more conservative stance and remain cautious.

They’re not going to risk inflation. So, if they deem it to be any kind of threat, they’ll probably take action – and that’s what we’ve not seen in the recent past.

But as I mentioned, household balance sheets do not appear under any kind of acute stress. We’ve seen the debt levels look relatively contained. But I think it speaks more to resilience than strength.

CIARAN RYAN: Is the labour market the real weak link in this picture that we’ve been talking about here? Is that going to be holding back, do you think, a stronger recovery?

ADRIAAN PASK: Yes, I think it’s fair to frame it that way.

The labour market is probably the clearest reason the economy still feels very difficult to people on the ground.

Formal employment has come under pressure. And that matters because ultimately that’s what sustains consumption and confidence in the economy, and what drives growth.

Even where household finances have been, in aggregate [improving], a weak job-growth [environment] limits how broad-based the improvement in the economy can really become, and how tangible it becomes to people on the ground.

It also explains why the economy can look acceptable in some top-down indicators, as I’ve mentioned, while many people still experience it as somewhat stagnant or stressful.

But I think it really comes down to both jobs and investment.

Those are probably the two at the centre stage of the discussion which needs to drive economic growth in South Africa.

If we can’t create jobs and can’t attract investment, those are really going to be the key detractors or hurdles for sustaining higher growth rates.

CIARAN RYAN: Looking ahead, what are the big domestic risks that could derail any improvement from here?

ADRIAAN PASK: Well, there are a few, and I think the first is just that weak investment simply persists, which would keep growth trapped in this low-growth environment. We need to attract more investment.

The second [risk] is really around the labour market stresses that we’ve mentioned. If we can’t create jobs, we can’t expect consumer spending; and if we don’t have consumer spending we don’t have growth.

The third would just be overall business activity which still seems quite soft – and that creates a risk that optimism about the next six months does not really translate into real momentum.

So we do see some reason for optimism, but if it can’t be backed up with actual business activity, then we might be found wanting on that front.

Obviously, I think the oil price is such a big story this year. It really does expose countries that are more vulnerable. We’ve seen that on our trade balance, for example. Things look quite close and all of a sudden the oil price moves higher and then you run into a trade deficit.

It’s things like that that can really make the difference between growing slowly or finding more negative signals in the data.

CIARAN RYAN: That was Adriaan Pask, chief investment officer at PSG Wealth. Thanks very much once again, Adriaan.

ADRIAAN PASK: Thanks, Ciaran. It’s been good to chat to you.

Brought to you by PSG Wealth.

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