South Africa’s growth to escalate slowly

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By Cees Bruggemans, Chief Economist of FNB.

Quarterly annualised, our GDP growth is set to normalize while happily preparing for the kick in the pants that is Christmas, even when seasonally adjusted.

For the recovery is gradually gaining strength.

It is great to do without strikes for a while (but for how long?). Now, if they only could fix ALL urban traffic lights and end the urban snarl, our bliss would be complete and our productivity so much higher.

Still, I expect 4Q2010 to be considerably better than the dismal second and third quarters. Manufacturing will unlikely be falling at a -5% rate again (I would expect growth) and government should do considerable better than 0.4%. Between them these two sectors represent nearly a third of the economy and could add some 1.0-1.5% to the 2.6% growth of 3Q2010.

Financial and business services growing 1.5% were rather anemic in 3Q2010. They may do better next time.

Another third of the economy is contributed by the trades (retail, wholesale, motor, accommodation), personal services, transport and communication. These grew by 3% in the aftermath of the world cup.

Given respectable income growth, two more interest rates cuts behind us, pleasant gains in net wealth (near peak-2008 levels as ratio to disposable income) and good yearend bonuses, with expectations on ALL these scores of MORE to come, how can we not spend MORE and support it with heightened activity in all these sectors?

That could mean another 0.2% plus for growth from here.

It is difficult seeing agriculture outperform 3Q2010, while mining enjoyed a comeback from depressed levels, perhaps also difficult to repeat. But then there remains resource slack in mining. It might continue to surprise on the upside, global demand and infrastructure willing.

Construction and electricity may still slide, given their realities. These small sectors needn’t impact in a major way on GDP, provided their sliding remains small.

The year 2011 will compare with a relatively low base, while income, assets and interest rates may continue to improve and escalate household and government consumption growth some more.

Fixed investment spending was the main drag in 2010, and is not expected to revive quickly, doing marginally better in 2011.

Between them, this may make for a slight acceleration in GDP growth, from the likely 2.8% of 2010 to 3.3%-3.5% in 2011, and faster still in 2012.

Globally, too, things should pan out, possibly better than so far skeptically discounted.

Germany’s growth has surprised positively, but it shouldn’t have, following a decade of hard preparation and gains in trade competitiveness.

German export gains seem to have spilled over into household consumer spending of late. Both the German export and consumer engines have probably benefited other European countries through increased German importing.

China’s condition is a worry for commodity producers as much as Germany. Elevated inflation has triggered policy actions trying to tame it, in the process clouding commodity producer and German trade prospects.

But perhaps this Chinese pullback story is being overdone. It seems the policy tightening isn’t going to be drastic and the bank loan growth nearly as high next year as this year. That wouldn’t suggest much slower growth.

If so, that would continue the bright German and commodity producer prospects. It would also favour the US growth prospects (provided the Yuan/Renminbi keeps appreciating, if slowly), reinforcing the US growth story, with its own consumers quietly regaining some vigour after much frugality, if held back by many drag anchors (credit restraint, saving compulsion, limited job gains, limited spending impetus).

European sovereign debt pressures are problematic, but Euro weakness could cancel this out.

The IMF continues to call the global growth outlook for 2011 in 4%-5% territory. It might well be a tad too conservative, not unusual on the way up in the presence of too much unresolved risk.

If so, South Africa should continue to succeed in getting its share of that global cake, despite a richly valued Rand. Some of our domestic spending will drain out as increased imports, but faster gains in our export prices over our import prices should keep giving a positive income shock to some of our producers.

Despite greyhairs in boardrooms taking their time relaxing their firm grip on corporate capex purses, bank credit committees remaining vigilant, and government departments and especially munis and most provinces staying lax in their infrastructure efforts as measured by contract pipelines, there will be GDP growth in 2011, and likely north of 3%, something that escaped us in 2010 even with the benefit of the Cup.

As to 2012 being north of 4% or not quite making it, this may become clearer as we move deeper into 2011.

For much can change along the way, as 2011 promises to be another dynamic year, globally and financially.

Source: Cees Bruggemens, FNB, November 29, 2010.

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