South African recovery unevenly on track

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By Cees Bruggemans, Chief Economist of FNB.

Although mid-2010 was a bit slow (3Q2010 showed as little as 2.6% growth), this was mostly due to strike action in manufacturing and the public sector (between them contributing nearly a third of economic activity).

With the strikes out of the way, manufacturers having to catch up, and the motor and retail trades not standing still, car sales motoring ahead at 30%, the 4Q2010 is likely to show faster growth.

The SARB leading indicator resumed rising strongly, hinting at renewed growth momentum in 2011. Electricity output bounced back strongly, growing by 4.7% and back near its capacity ceiling.

In October, mining output was up 5.6%, with just four commodities (platinum group metals, coal, gold and iron ore) contributing 80% of total output by value.

Manufacturing rose by 2.5%, with strong gains in motor cars and parts (+21%), food and beverages (+6%) and wood products, paper, publishing, printing (+7%). Big declines were still recorded in textiles (-9%), furniture (-6%) and communication equipment (-11%).

Retail trade volumes rose by 6%, with strong gains in furniture and appliances and in pharmaceuticals, medicines and cosmetics (both sectors by +17%). Textiles, clothing and footwear did +9% and general dealers +5%. In contrast, food and beverages only gained 0.6% and building merchants did -0.7%.

Whereas the first three quarter of 2010 showed 2.5% GDP growth year on year, once the 4Q2010 has made its mark the year overall will probably show 2.8% GDP growth.

Growth is expected to accelerate slightly to 3.3% in 2011 under the influence of good income growth, giving rise to stronger household spending, even as fixed investment is likely to remain slow.

Household disposable income grew by 8% year-on-year in 3Q2010 according to SARB estimates. When seen against 3.5% inflation, it suggests strong real income gains despite large public sector tariff increases.

With interest rates lowered by 6.5% these past two years, the financial position of many households has improved. The FNB/BER consumer confidence survey shows a large majority of especially households with monthly incomes over R5000 indicating confidence in their own finances.

SARB publishes a net wealth ratio relative to disposable income. By 3Q2010 this ratio had clawed back 40% of its mid-2008/2009 decline. Following equity market strength in recent months, this ratio probably further improved during late 2010, bolstering confidence.

Furthermore, households in good credit standing rose for the first time in three years, inducing many retailers to step up their marketing campaigns this festive season.

Thus good salary gains (even when adjusted for job losses), lower interest rates, strong asset market recovery (except for property due to high debt loads) and improving creditworthiness all suggest good consumption revival carrying through into 2011.

This needs to be set off against a grimmer picture in our external trade and domestic fixed investment.

Export volumes haven’t improved much these past two years on account of problems in mining, a strong Rand, electricity constraints and slow growth in key overseas export markets.

Also, our infrastructure effort has slowed down, with new contracts being allocated sparingly.

Private fixed investment remains subdued as capacity utilization in industry is still low (below 80%), growth is gradual and many businesses uncertain about prospects, still taking a defensive wait-and-see attitude.

Although private investment prospects should start to brighten somewhat from later in 2011, businesses are likely to be slow off the mark.

Thus our growth will remain consumption-led while fixed investment takes its time recovering, with considerable uncertainty remaining about exports.

Meanwhile, global events may keep supporting a firm Rand below 7:$ and 9:€. The US economy is only recovering slowly, with its central bank willing to create more liquidity through bond buying, while President Obama has done a deal with Republicans, extending the Bush tax cuts for another two years, extending unemployment relief for another 13 months, and granting a $120bn payroll tax holiday.

This will stimulate US growth but may also keep encouraging US capital outflows in search of higher yields abroad. The uncertainty surrounding these activities has benefited precious metals, both instances favouring South Africa.

Europe’s sovereign debt and banking problems weigh on the Euro, also feeding into higher precious metal prices.

In contrast, China’s higher inflation has led to policy tightening in that country, putting a bit of a dampener on global commodity prospects.

Overall, global conditions apparently continue to support a firm Rand and appear favourable for our bonds and equities, while assisting in keeping inflation and interest rates low.

CPI inflation may average 4% in 2011 and 4.8% in 2012.

With the prime interest rate already at 9%, our interest rates are expected to remain low through all of 2011, with speculation about another 0.5% rate cut in early 2011 remaining alive (though not at present signaled by market pricing).

Source: Cees Bruggemans, FNB, December 13, 2010.

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