Slowbalisation is the new globalisation

PwC Strategy&’s 2020 global economic outlook and implications for South African companies

Key points

  • Trading goods across borders remains tense – The global volume of merchandise trade went in reverse in 2019: we expect this trend to continue in 2020 and for trade tensions in the global goods market to persist. Globalisation is likely to give way to ‘slowbalisation’, i.e. continued integration of the global economy via trade, financial and other flows, albeit at a significantly slower pace. A switch from globalisation to slowbalisation is bad news for South African exporters of, for example, wine fruit producers, platinum mines and vehicle manufacturers. It is an unwelcome development that will require export-oriented South African companies to consider various scenarios for the world economy and global trade patterns in the short to medium term. Some 69.4% of South African CEOs are somewhat or extremely concerned about trade conflicts.
  • World services trade increasing to R100 trillion – We expect the total value of services exported to increase from R78 billion (3.5% of global GDP) in 2018 to R100 trillion by 2020. The US and UK are likely to remain the first and second largest exporters of services in the world. President Cyril Ramaphosa said in his first State of the Nation Address (SONA) in 2019 that the government will have a focus on exporting services like, for example, business process outsourcing: PwC’s calculations show that business services are amongst the most impactful industries in South Africa based on the growth and jobs that can be created by investment in the sector.
  • Global economy growing at a modest pace – We expect the global economy to expand at a rate of 3.5% in 2020 – i.e. below the post-2000 average of 3.8% p.a. We expect all major economies to grow, buoyed in part by accommodative financial conditions. The South African economy has for some years deviated from global growth trends and followed its own trajectory. As such, a shift in global growth is not a direct signal as to the fate of South African business. However, it is the slowdown in growth in key trade and investment partners – the US, UK, euro zone and China – that will adversely impact individual companies. Some 38.9% of South African CEOs surveyed by PwC want to enter a new market in the next 12 months to drive revenue growth.
  • US oil production hitting record levels – Global renewable energy and nuclear consumption will make up more than 20% of global energy consumption this year, which is the highest it has ever been. However, oil will continue as the most preferred source of energy in 2020 for the world economy. The US may surpass the 13 million barrels per day production threshold in 2020 compared to just 5.5 million barrels per day some 10 years ago. The US is not amongst South Africa’s top suppliers of petroleum products, so these production numbers are not of direct interest to domestic fuel consumption. Where it is important is the impact of US production on oil prices: the ramp-up in production has cushioned prices in recent years. South Africa is a price-taker in the oil market that makes it vulnerable to external factor. Some 63.9% of South African CEOs surveyed by PwC are somewhat or extremely concerned about volatile energy costs.
  • BRICS partner India rising in global economic rankings - India overtook the UK and France in 2020 to become the fifth largest economy in the world. This is an ongoing process with India likely to overtake Germany before 2025 and Japan before 2030 to become the world’s largest economy behind China and the US. India is South Africa’s closest (from a geographic perspective) BRICS partner. A healthy Indian economy could be good for South Africa from a trade and investment perspective. South African President Cyril Ramaphosa visited India in January 2019 and signed a Three-Year Strategic Programme with Indian Prime Minister Narendra Modi aimed at deepening bilateral engagement between India and South Africa and ensuring that a result-orientated partnership benefits the people of both countries.

In this document, PwC presents five themes we assess will likely prevail in the global economy in 2020, as well as the implications for South African companies. Three out of four South African CEOs surveyed in the PwC 23rd Annual Global CEO Survey are extremely concerned about local economic growth. This highlights the uncertainties facing the South African economy and its private sector.

At PwC we know that the future of complex economic and political systems is plural rather than singular. Scenario planning creates a range of alternative futures for a specific country/region/industry. We work with our clients to understand their business and challenges. This includes scanning the environment for known factors and trends, as well as elements beyond their control. Crucially, we collaborate to determine high impact, high uncertainty factors. With this information, we can build and flesh out different scenarios that are customised to the client.

  • Trading goods across borders remains tense

A defining feature of the global economy since at least the 1970’s has been globalisation—the bringing together of economies predominantly via more liberal trade flows. However, the global volume of merchandise traded slowed down dramatically and even went in reverse in 2019 - in contrast to a 21st-century average growth rate of about 3.4% per annum. Also, in December 2019, the World Trade Organisation’s (WTO) dispute settlement mechanism was effectively disbanded. We expect this trend to continue in 2020 and for trade tensions in the global goods market to persist. This means that we assess globalisation is likely to give way to ‘slowbalisation’, i.e. continued integration of the global economy via trade, financial and other flows, albeit at a significantly slower pace. Large businesses with sophisticated supply chains spread across the world should therefore plan for a variety of scenarios, some of which have not been experienced in recent history.

South Africa has in recent years been a net exporter (i.e. exports have been larger in value compared to import) of goods. The export of agricultural commodities, mineral and manufactured items is an important generator of foreign currency and creator of employment opportunities. A switch from globalisation momentum to slowbalisation is bad news for South African exporters like, for example, wine fruit producers, platinum mines and vehicle manufacturers. It is an unwelcome development that will require export-oriented South African companies to consider various scenarios for the world economy and global trade patterns in the short to medium term. Some 69.4% of South African CEOs are somewhat or extremely concerned about trade conflicts. On a positive note, as global trade dynamics wither, the African continent is on the cusp of becoming a more attractive export option. The African Continental Free Trade Area (AfCFTA) is currently slated to be operation from July this year – member states agreed last year to a 90% tariff liberalisation from this date.

  • World services trade increasing to R100 trillion

One aspect of trade that is often neglected is trade in services, which is now about one third of the size of the global volume of merchandise trade. In contrast to goods, services remain largely unaffected from tariff wars. The latest data from the International Trade Centre (ITC) shows that the global export of services was worth about R78 billion, or around 3.5% of global GDP, in 2018. We expect the total value of services exported to hit a record R100 trillion by 2020. Assuming historic trends continue, the US and UK are likely to remain the first and second largest exporters of services in the world. But in yet another reminder of the shift of the centre of economic power from the West to the East, we expect China to overtake France in 2020 and become the world’s fourth largest services exporter.

President Cyril Ramaphosa said in his first State of the Nation Address (SONA) in 2019 that South Africa must find export markets for its goods and services to significantly grow employment. In this regard, the government will have a focus on exporting services like, for example, business process outsourcing and remote medical procedures. PwC’s calculations show that business services are amongst the most impactful industries in South Africa based on the growth and jobs that can be created by investment in the sector. The services sector is already dominant within the economy – accounting for 60% of GDP – through, for example, the country’s modern financial sector and popular tourism industry.

  • Global economy growing at a modest pace

In our main scenario for 2020, we expect the global economy to expand at a rate of around 3.5% which is below the 21stcentury average of 3.8% per annum. We expect all of the major economies to grow, buoyed, in part, by accommodative financial conditions. US economic activity is likely to expand by around 2%, in line with its potential rate. Given the historically low unemployment rate, US employers, however, find it increasingly difficult to hire staff. Across the pond, the euro zone is expected to grow at approximately half that rate (i.e. around 1%). Germany, and other economies that are sensitive to global trade flows, to become more reliant on household consumption as a source of growth instead of net exports and investment. For Germany, however, this could be challenging as households tend to save more than the European average. In the emerging world, we expect the Chinese economy to expand by less than 6%-- but it can still add the equivalent of Saudi Arabia to the world economy in one year. The world’s six other largest emerging economies, including Turkey, should also grow in this scenario, with India (see below) leading the way.

The South African economy has for some years deviated from global growth trends and followed its own (weak) trajectory. As such, a shift in global growth is not a direct signal as to the fate of South African business. However, it is the slowdown in growth in key trade and investment partners – the US, UK, euro zone and China – that will adversely impact individual companies. The IHS Markit South Africa Purchasing Managers Index (PMI) – a gauge of private sector business activity in the country – declined to a 14-month low in December 2019 partly as a result of a fall in export orders. Overall, sales to offshore clients declined for a fourth straight month as the year closed. The Absa Purchasing Managers’ Index (PMI) also noted weaker external demand for manufactured goods at the end of 2019 and concern that export demand will continue to falter in the first half of 2020. This is a significant point of concern for South African companies who have been looking externally for market growth given the weak domestic economy. Some 38.9% of South African CEOs surveyed by PwC want to enter a new market in the next 12 months in order to drive revenue growth.

  • US oil production hitting record levels

Global renewable energy and nuclear consumption will likely make up more than 20% of global energy consumption this year, which is the highest it has ever been. The rise of renewable energy reflects how businesses, households and governments are adapting and changing their attitudes. China is expected to be the largest consumer of this type of energy closely followed by Europe. However, oil is expected to continue to remain the most preferred source of energy in 2020 for the world economy followed by coal and natural gas. The US and China will almost certainly remain the largest consumers of oil in the world in 2020. In so far as the extraction and supply of oil (and other liquid forms of energy) is concerned, the US may surpass the monthly 13 million barrels per day threshold. To set this into context, US crude oil was extracted at a rate of 5.5 million barrels per day some 10 years ago.

The US is not amongst South Africa’s top 10 suppliers of petroleum product imports so these production numbers are not of direct interest to domestic fuel consumption. Where it is important is the impact of US production on oil prices: the ramp-up in production has definitely cushioned oil prices in recent years. South Africa is a price-taker in the oil market: a volatile exchange rate and reliance on imported oil makes it vulnerable to spikes in local pump prices due to external factors. While global markets are currently looking at downward pressure on oil due to the potential impact of the Coronavirus on the world economy, upwards pressure could materialise again at any time. (It was just weeks ago, for example, that a US-Iran war was being talked about.) Some 63.9% of South African CEOs surveyed by PwC are somewhat or extremely concerned about volatile energy costs.

  • India rising in global economic rankings

According to the IMF’s latest estimates, 2019 was the year when India overtook the UK and France to become the fifth largest economy in the world. This is an ongoing process with India likely on current trends to overtake Germany before 2025 and Japan before 2030 to become the world’s largest economy behind China and the US. France and the UK will likely now vie for sixth place in the rankings, with their relative position dependent on the value of the pound against the euro which may remain volatile in 2020.

India is South Africa’s closest (from a geographic perspective) BRICS partner. The latter is the smallest member of the emerging market grouping while at the same time counting the other BRICs countries as key trading partners. A healthy Indian economy could be good for South Africa from a trade and investment perspective. (The volume of Indian imports is expected by the International Monetary Fund to grow by 7.5% this year.) South African President Cyril Ramaphosa visited India in January 2019 and signed a Three-Year Strategic Programme with Indian Prime Minister Narendra Modi aimed at deepening bilateral engagement between India and South Africa and ensuring that a result-orientated partnership benefits the people of both countries. However, only 8.3% of South African CEOs surveyed by PwC consider India most important for their organisation's overall growth prospects over the next 12 months.

Global population - biggest it has ever been but also the greyest

According to the United Nations (UN), the world’s population is expected to reach 7.7 billion in 2020 - around a 10% increase compared to a decade ago. China, India and Sub-Saharan Africa are expected to drive around half of the world’s annual population increase. At the same time, the number of people above the age of 60 globally is expected to surpass the one billion mark. China is expected to have a larger number of people above the age of 65 than all the six other largest emerging economies put together. This calls into question how policymakers respond to this trend and fund future health and social care. This could also be an opportunity for businesses in advanced economies, who have been dealing with such issues for decades. In relative terms i.e. the proportion of people above the age of 65 relative to the country’s entire population, Japan is expected to remain the ‘greyest’ country in the world and Niger is expected to be the youngest. More than half a billion people are expected to live in the 30 largest cities of the world. Of these cities, five are expected to be in the G7 economies whereas the rest are expected to be in mostly emerging economies. According to the UN, Tokyo is expected to be the largest city in the world in terms of population, followed by Delhi and Shanghai.

Forecast table

The table below forms our main scenario projections as at January 2020 and are therefore subject to considerable uncertainties. The UK main scenario, for example, assumes a smooth Brexit.

Table 1: Real GDP growth forecasts (%)

  2019e 2020f 2021f
Global 2.7 2.6 2.8
G7 1.7 1.4 1.6
E7 4.8 4.9 4.9
United States 2.4 1.8 2.1
China 6.2 5.8 5.7
Japan 0.9 0.5 0.5
United Kingdom 1.1 1.2 1.5
Euro zone 1.1 1.1 1.3
France 1.3 1.2 1.3
Germany 0.6 0.9 1.3
Greece 1.9 2.1 2.2
Ireland 4.3 3.0 3.1
Italy 0.1 0.4 0.7
Netherlands 1.7 1.4 1.5
Spain 2.3 1.8 1.8
Poland 4.3 3.5 3.1
Russia 1.0 1.7 1.8
Turkey -0.1 2.5 2.9
Australia 1.8 2.3 2.6
India 5.8 6.5 7.0
Indonesia 5.0 5.1 5.2
South Korea 1.9 2.1 2.5
Brazil 1.2 2.0 2.4
Canada 1.6 1.8 1.8
Mexico 0.4 1.3 1.4
South Africa 0.5 1.1 1.4
Nigeria 2.1 2.5 2.5
Saudi Arabia 0.1 1.8 2.2

Source: PwC[1]

G7 = Canada, France, Germany, Italy, Japan, UK, US.

E7 = China, India, Brazil, Mexico, Russia, Indonesia, Turkey

[1] PwC, 2020. Global Economy Watch - Predictions for 2020. https://www.pwc.com/gx/en/issues/economy/global-economy-watch/assets/pdfs/predictions-2020.pdf


Article compiled by Lullu Krugel, Chief Economist for PwC Strategy& Africa, and Dr Christie  Viljoen, PwC Strategy&.

 

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