The impact of the escalating global trade war is likely to shave 0.1% off South Africa's gross domestic product (GDP) baseline forecast in 2019 and 0.2% in 2020, according to Fitch Ratings' June 2018 "Global Economic Outlook" baseline forecast.
Fitch forecast that the escalation in the trade war is likely to reduce the world GDP by 0.4% in 2019 and by 0.3% in 2020.
"An escalation of global trade tensions that results in new tariffs on $2trn in global trade flows would reduce world growth by 0.4% in 2019, to 2.8% from 3.2%," the Fitch Ratings said in a statement on Wednesday.
The US, Canada and Mexico would be the most affected countries. Fitch expects China would be less severely impacted, with GDP growth around 0.3% below the baseline forecast. Fitch points out that China would only be affected directly by US protectionist measures, whereas the US would be imposing tariffs on a large proportion of its imports, while being hit simultaneously by retaliatory measures from four countries or trading blocs.
"The imposition of further tariff measures currently being considered by the US administration and commensurate retaliatory tariffs on US goods by the EU, China, Canada and Mexico would mark a significant escalation from tariff measures imposed to date," according to Fitch.
"The tariffs would initially feed through to higher import prices, raising firms' costs and reducing real wages. Business confidence and equity prices would also be dampened, further weighing on business investment and reducing consumption through a wealth effect."
Export competitiveness in the countries subject to tariffs would decline, resulting in lower export volumes. The negative growth effects would be magnified by trade multipliers and feed through to other trading partners not directly targeted by the tariffs. Import substitution would offset some of the growth shock in the countries imposing import tariffs.
Fitch forecasts that most countries not directly involved in the trade war would see their GDP falling below baseline, though generally at a much lower scale.
Net commodity exporters would be more severely hit, as slower world growth would push oil and hard commodity prices down. On the other hand, for some net commodity importers, the benefits from lower hard commodity prices would more than offset the impact of lower world growth.
South Africa’s economy fell into a recession for the first time since 2009 after it contracted for a second straight quarter in the first three months of the year as all bar two industries shrank.
Gross domestic product receded an annualized 0.7 percent in the first quarter from a contraction of 0.3 percent in the previous three months, Statistics South Africa said in a report released on Tuesday in the capital, Pretoria. The median of 19 economists’ estimates in a Bloomberg survey was for 1 percent expansion. There was only one forecast for a contraction.
While rains are helping Africa’s most-industrialized economy recover from a 2015 drought that was the worst since records started more than a century earlier, political uncertainty has hampered implementing reforms aimed at boosting growth. President Jacob Zuma changed his cabinet and fired Pravin Gordhan as finance minister in March, a move that saw the nation lose its investment-grade status with two ratings companies for the first time in 17 years.
“There is a risk that these contractions are not over and we could see another negative coming out in the second quarter of this year,” Annabel Bishop, the chief economist at Investec Ltd., said by phone from Johannesburg.
All industries except agriculture and mining contracted in the quarter, the statistics office said. The finance, real estate and business services industry shrank 1.2 percent, the first decline since at least the first quarter of 2013.
The rand lost 1.4 percent to 12.8920 per dollar by 12:22 p.m. Yields on rand-denominated government bonds due December 2026 rose 6 basis points to 8.49 percent, the first increase in five days. The six-member banks index extended declines after the release, dropping 1.7 percent in Johannesburg.
S&P Global Ratings and Fitch Ratings Ltd. affirmed South Africa’s debt at the highest non-investment grade last week, with both companies saying policy uncertainty, political turmoil and slow economic growth pose a risk to fiscal consolidation. Moody’s Investors Service, which rates the nation at two levels above junk, has the nation on review for a downgrade.
“The rating agencies, even if they have already done their assessments, will no doubt be downgrading their GDP outlook off the basis of these numbers,” Gina Schoeman, an economist at Citigroup Inc. in Johannesburg, said by phone.
South Africa’s growth slowed to 0.3 percent last year, the lowest rate since 2009, after low commodity prices, the effects of the prior year’s drought and weak demand for locally made goods weighed on output. Unemployment rose to a 14-year high in the first quarter. The business confidence index remains near the lowest level in more than two decades.
“The first quarter ended with the cabinet reshuffle and the second quarter started with the credit-rating downgrades, so in terms of consumer and business sentiment I can’t see an improvement,” Christie Viljoen, an economist at KPMG LLP in Cape Town, said by phone. “I’m not excited about a big turnaround in the GDP numbers for the second quarter, there’s just no reason to believe that at this stage.”
The central bank on May 25 reduced its forecast for growth this year to 1 percent from 1.2 percent, and trimmed the outlook for 2018 to 1.5 percent from 1.7 percent because of the anticipated impact of the downgrades.