Our next growth cycle 2010-2018

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By Cees Bruggemans

With the rich industrial world facing slow growth recovery (Europe more so than the US because of internal rigidities and export dependence), and our own domestic political economy strained (more signs of labour strive), what kind of growth prospects do we have?

Or as a previous chairman never ceased asking me in jest whenever he saw me “Prospects? Are there any prospects?”

Happily, things are hardly this dark, for cyclical and structural reasons. After losing 1% of GDP in 2009, we are likely to bounce back to our long-term average growth of 3.5% quite quickly.

Thereafter, the longevity of our next expansion will depend on global forces and our policymakers. Whether we get eventually another period of outperformance will depend on circumstance, mostly capital-linked.

Recession will end for the same reasons it started, namely the industrial inventory destocking will end, restoring more normal industrial output conditions. This will apply as much globally as locally, so our non-gold mining export volumes and our manufacturing output should start bouncing back later this year.

We should also see a gradual recovery in consumer durable expenditure such as cars, furniture and household appliances. While currently still cautious and credit-restricted, these conditions will ease as consumers make adjustments to their debt and cash flow conditions, with lower interest rates reducing debt servicing burdens, the stock of durables not getting any younger, and the various trades in need eventually likely to start raising alternative finance to service their clients.

Private fixed investment will be late bouncing back (remaining depressed for another year on account of generous resource slack). Household expenditure will also take time recovering, given limited income gains. Unions should still win good wage increases if at the expense of widespread employment losses, but flexible income (commissions, overtime, bonuses) will initially still be under pressure in favour of productivity and business income recovery.

Meanwhile government spending will remain strongly supportive, both infrastructure and social spending-wise. Net exports should be favourable, too.

The main growth engine will be global, Asia leading (China recovering to 10% growth next year, closely followed by India to 7%, with others more dependent on global exports recovering more slowly).

Asian recovery will this time be more domestic-led, also the reason why leading elements didn’t descent into recession. Meanwhile, US growth is set to recover gradually these next twelve months on the back of inventory bounces, strong government spending, slow household recovery, ending of business cutbacks and favourable trade effects.

Europe will probably be the slowest coach, offering only inadequate domestic responses and remaining nearly entirely dependent for its growth on export impulses, probably more so than Asia.

Important for us will be Asian recovery in commodity demand and our export prices. Slow Western recovery should mean excess capital, even after funding domestic government borrowing needs. Together with Asian and commodity producer surpluses the world will remain awash in capital, central bank underwritten for the time being. The cherry on top will be even greater appetite for diversification to emerging markets.

The firming Rand in recent months reflects capital availability. This should not cease soon, keeping the Rand firm (to the extent of unwanted attention, as seen before). This will provide some bulwark against rising commodity prices and renewed inflation surges.

Though interest rates will probably lift during 2011-12, inflation-driven, this need not prematurely end our expansion, provided the world economy keeps expanding. Given impatient Asian growth aspirations and resource slack in the industrial world, two Obama presidential terms may be required to get the world back to full growth potential, also shaping our cyclical expansion.

Source: Cees Bruggemans, FNB, June 17, 2009.

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