It’s winter again, and we are discontent

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By Jeremy Gardiner

It’s still summer in Cape Town, but now that we are into March, there is definitely a slight seasonal change underway, which will finally manifest itself in cold and rain by June. Miserable weather will then follow for five months, and then just as you have finally given up hope that decent weather will ever return, spring arrives followed by another six months of sun.

The economy is no different. The official definition of a recession is two consecutive quarters of negative growth. A recession is a normal, (albeit unpleasant) phase of any business cycle. However, both slowing growth and a recession are generally followed by lower interest rates, which lead to a recovery in growth, the economy and stock markets.

Economically, the world is in winter. It has been a tremendous summer, particularly in South Africa. We have had four years of excellent equity returns, four years of 5%+ GDP growth (the fastest rate in 25 years), a massive property boom, low interest rates and a strong, stable currency. Now we have weakening stock markets (in certain sectors more than others), a weaker currency, a weaker property market and slowing growth.

If it is any consolation, the mood in America is worse! They are being ravaged by subprime; they are heavily over-indebted; many are losing their homes; house prices are plunging; the US dollar has almost halved since 2002 and they are either already in or heading for a recession.

Fortunately, across Asia, it is mid-summer economically. In fact, the Chinese have the opposite problem to the Americans. With inflation close to 7%, they are trying desperately to cool their economy. They allowed their currency to strengthen, they raised rates six times last year and they restricted credit, yet growth still came through at 11.6%.

Of course our problems are not all economic. Infrastructure problems look set to take centre stage for the next three years as a combination of strong growth and poor planning result in poor delivery. I don’t think any of us are naïve enough to believe that electricity will be the last issue. Water, sewerage and roads are all potential problem areas, which look vulnerable in the short term, but should be addressed in government’s R400-600 billion infrastructure programme over the next three to five years.

Once again, talk of emigration is everywhere. While infrastructure issues no doubt will affect growth and jobs as well as cause immense frustration, most South Africans can work through these. Unfortunately though, violent crime is not something civilised society can digest and until we start showing proper commitment to eradicating this cancer from our society, as a country we will continue to bleed much needed skills.

The good news is that our economic woes are cyclical. At some stage markets will resume their upward trend. In fact, you have probably already seen the worst, but you will have to be patient for another 6, 12 or maybe even 18 months as subprime works through the system, causing turbulence as it passes.

House prices are going sideways and will probably do so for some time, but at some stage will pick up again. Growth will slow, but we are not headed for a recession. Expect 3.5% – 4% this year, rising again from next year through 2010.

Inflation will likely peak in the first half, but because of the weaker rand driving petrol prices, won’t come off as quickly as previously expected.

Rates shouldn’t rise further, but any relief during 2008 looks increasingly unlikely. The rand is currently under severe pressure, so expect it to regain some composure, but in the long run get used to a weaker currency and plan accordingly with your investments.

It would be great if every month in Cape Town could be February, but it can’t. Just as sure as night comes after day, winter comes after summer. Economically it is winter; dress warmly, and don’t become too despondent, and because it is not a repeat of 2001, where you had high equity prices followed by a collapse in earnings, summer will come again. Just give it 6 – 18 months.

Source: Jeremy Gardiner, Investec Asset Management, March 6, 2008.

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