Economic recovery delayed until 2010

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Added on 23 July 2009 @ 2:26 PM

Near-term prospects for South Africa's economic growth remain poor, with GDP expected to have contracted again in the second quarter of 2009 and only a moderate improvement seen during the second half of the year, according to OMIGSA chief economist Rian le Roux. In fact, he says, although some tentative signs of stabilisation have emerged over the last few weeks, the local economy is unlikely to see a decent recovery until next year.

"Although we had earlier forecast a recovery for the second half of this year, in line with the global business cycle, it now looks as though the headwinds facing the local economy are stronger than expected, so this recovery will be slow and possibly even delayed," elaborates le Roux. "We are expecting a contraction in GDP of -2.0% this year and a recovery of only about 2.0% next year, including the likely stimulatory impact of the World Cup."

In terms of headwinds, he says, global growth prospects are bleak, inflation has remained higher for longer, consumers' finances continue to be under pressure, the strong rand is hurting our manufacturing and mining exports, and the South African Reserve Bank (SARB)'s easier monetary policy is being partially offset by tight bank lending standards and effective public sector taxes (higher education, municipal and electricity charges).

These same cost increases, plus high wage settlements, are also creating strong cost-push pressures that make the medium-term outlook for inflation less than rosy.

"Although we have recently seen some declines in raw food prices and the strong rand has helped contain import prices, CPI looks unlikely to fall within the SARB's 3%-6% target band this year. Nevertheless, we do expect the gradual downtrend to continue, and we could see a low for the year just above 6% at some point in the third quarter."

On top of these concerns, he says, the government's potential budget deficit of up to 6% of GDP, compared to the February budget estimate of 3.8%, is an added concern. While the financing of the additional shortfall should not be problematic, the poor medium-term economic growth, and, hence, tax revenue prospects, will limit government's medium-term options as the deficit will have to be curtailed once the economy recovers.

All of these latest developments, as well as conditions overseas, give rise to questions around the "generally accepted" level of South Africa's longer-term growth potential of just over 4.0%, notes le Roux.

Factors that could contribute to slowing this potential include: structurally slower world growth; a too-strong and volatile rand, amidst already difficult global economic conditions; SA's low overall savings rate; a collapsing gold mining industry, offsetting growth in other mining sectors; poor public sector service delivery and remaining infrastructure limitations; labour problems (skills shortages, high wage demands); and social issues such as crime and corruption.

With growing concerns among both local and foreign investors about South Africa's true longer-term growth potential, the new administration will have to take tough and decisive action as a matter of urgency to address the obstacles to higher growth and job creation in South Africa over the medium to longer term.

On the positive side, there have been some signs of stabilisation appearing in the local economy in the past few weeks, with car and commercial vehicle sales showing some improvement. Electricity production and new manufacturing orders from purchasing managers (as reflected in the Kagiso Purchasing Managers Index) have also picked up. And the effects of the cumulative 450 basis points in interest rate cuts by the SARB have yet to be fully felt by consumers and businesses, which should help bolster the economy in the coming six months.

Fairbairn Capital | Old Mutual

Investment Intelligence|Articles

Economic recovery delayed until 2010

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