Two growth engines and many drag anchors

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By Cees Bruggemans, Chief Economist of FNB.

South Africa has two growth engines at present on forward thrust and many drag anchors wanting it not to go anywhere.

Confused?

The two growth engines are household consumption, coyly responding to lively income and select asset gains, and the terms of trade (export minus import prices) imparting a growing external income windfall to the nation.

These are two horses with their bits firmly between the teeth, pulling the wagon through the drift, despite the many drag anchors expertly deployed for maximum effect.

There is the fixed investment story, with the public sector having lost its growth locomotive lead and yet to show evidence of having regained it (despite heroic intentions daily regurgitated); and the private sector having for now lost its risk appetite, as much recession, global shock and resource slack induced.

If those generally restraining features weren’t bad enough, there is the industry specific stuff.

The electricity constraint on heavy industry expansion (a blessing according to some, but one wonders), the credit blockage in residential property (perhaps an overdue slimming exercise according to some, but once again one wonders), the strong Rand (another wonderful opportunity to exert many producers and their labour forces to yet greater feats of productivity, though one wonders about those unable to adapt enough), inadequate infrastructure (lost opportunity), the uncertainty overhanging the mining industry (while other countries doubled and doubled again their abilities), and the many departments of state not quite fulfilling their quotas of growth-enhancing service deliveries.

The list of negatives is far longer than the two positives, yet the two positives are strong horses in the short-term.

Despite the property indigestion and the drain on income via many higher public user charges, the household sector is giving every hint of wanting to get on with spending, considering both the willingness to do so (as per the FNB/BER consumer confidence index) and actual motor trade and retail sales gains.

And despite the many drag anchors on business, the external terms-of-trade income shock is a whopper, the biggest in sixty years (according to SARB data) and still gaining in intensity (judging from daily commodity data).

Heaven knows where our terms of trade will be traveling next year, but are we on our way to the highest level in a century? And if so, would this external income shock start to approximate what happens in young commodity exporters in the full flush of first youth (like South Africa between 1865-1900)?

Does one have enough imagination to fully appreciate what is shaping here?

A positive terms-of-trade shock of course doesn’t last, and some analysts may want to start focusing on its eventual demise even before we have seen the final spike.

But given the state of world and commodity flux, my sense would be to first fully digest the ultimate outline of this positive terms-of-trade income shock, and only eventually after it is truly over to get clever about the decline phase. If only because the ascent may be higher and more prolonged than so far imagined or discounted.

Given these two powerful growth engines in the short-term, one can only deplore the presence of so many drag anchors, and the lost opportunity of launching South Africa on a much more rapid cyclical upswing.

Still, even with all our drag anchors fully extended we may yet achieve 3%-3.5% growth for some time.

Source: Cees Bruggemans, First National Bank, November 17, 2010.

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