Military terminology has its uses. Shock & awe. You get in a flash where that is leading. Are we witnessing the equivalent in our economy, being a small EM commodity producer in a badly upended world, further raked by many internal forces completely at variance with her general welfare, instead more politically inclined, seeking change, if need be at any cost?

Recent months proved extremely shocking and damaging. What we are left with is aftermath, digesting their playout. But what if skimming the zero line when looking forward isn't good enough? Projecting slowdown to near zero growth but then skimming rather than breaking lower? If we live in an era of major upsets, coming from many adjustment processes, having the effect of serially pummeling the economy and rearranging especially her financial furniture (Rand, inflation, interest rates, equity and bond markets)? What is it that we need to plan for: skimming or being awed? Indeed, shocked out of our socks, like some people before us elsewhere? Into recession?

It isn't as if we don't understand the playing field or its many effects. Externally, last year could be defined as US Fed liftoff, Chinese Yuan decoupling and stock market school fees, and the oil patch being rearranged. Domestically, these externals shocked the Rand, further reinforced by our paradigm clashes (Government vs Business) and drought.

Will this year be any different? Externally, the Fed, China and the oil patch are the main event agents, though Europe and Middle East also retain shock value.

But besides such ongoing external drivers, our domestic ones could be rising populist discontent (just sporadic, or generational?) in a context shaped by ongoing paradigm clashes offering little growth dynamic.

That suggests as yet more Rand shock potential, more inflation upside risk, and more macro responses needed (fiscal, interest rates), all reinforcing the growth downside. Much more than so far advertised.

That is no longer “skimming the pond”. That is going into the ground, through the zero line.

Imagine if global oil and food prices had not been falling this past year. Our burdens by now would be $20bn (R300bn in a R4 trill economy) bigger than what they actually are. It could have been so much worse already. And may still be one day when global oil & food prices turn up again (bad harvests, friends doing deals?).

That isn't our worry now, and may not be a worry for some time. What stares us in the face is that financial deterioration (having your furniture rearranged) can happen very quickly. Just ask commodity producers like Russia and Brazil, who also lost focus at home, and thereby the greater economic plot, both now in deep prolonged recession. We have really only two doorstops preventing our door slamming shut, SARB and Treasury.

Markets offered SARB the usual enticement (our way or the high way) and that invite is very powerful and rarely resisted. We tend to take punishment with flair, upping rates, acknowledging that risk/reward has shifted. 

Finance minister Gordhan is next. Nice stories three weeks hence won't cut it. The world wants its pound of flesh if we want to retain credibility. That suggests public sector job freeze, tight spending ceiling, possibly some more shifting of fixed investment spending to fund extra needs (drought relief, higher education, higher interest burden). And then there is an array of higher tax possibilities, with as main aim a reduced budget deficit. If still showing 4% of GDP, that would not cut it with markets and rating agencies.

Yet both SARB and Treasury acting aggressively, via higher interest rates and reduced budget deficit, will likely weigh on an already weak economy. Weaker growth is specifically a red flag for rating agencies. Sidestepping junk status later this year will presumably be increasingly difficult.

All this aside of what it will do in a key local election year. Will tax increases be ignored by the electorate? Or will finance minister Gordhan tread lightly as to whose burdens will increase?

Everything suggests households will find 2016 an increasingly difficult year. Jobs can be expected to be lost, inflation will spike and erode real purchasing power, confidence decline further. The recession in the motor trade of the past two years is likely to deepen, and retail conditions likely be very tight.

The Zuma presidency started in a recession year. One wonders how it will end. No doubt with a certain style.

 Cees Bruggemans

Bruggemans & Associates, Consulting Economists 

Website www.bruggemans.co.za

Email  economics@bruggemans.co.za This email address is being protected from spambots. You need JavaScript enabled to view it.

Twitter  @ceesbruggemans

LinkedLn 

Short Profile Dr CW Bruggemans

Chairman, Bruggemans & Associates Consulting Economists

Consulting Economist, Avior Capital Markets

Consulting Economist, Ince (Pty) Ltd

Consulting Economist, Hellmann Logistics (Pty) Ltd

Consulting Economist, Bureau for Economic Research (BER), Stellenbosch

Honorary Professor of Economics, University of Stellenbosch