South Africa keeps gearing up

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By Cees Bruggemans, Chief Economist of FNB.

Things are looking up.

Oil at $124. Petrol over R10/l. PPI inflation at 7.3%. Rand at 6.62:$ (after 6.56).

But also SARB leading indicators up another 1%. Gold $1550, platinum $1861 (both well off weekend peaks).

Not everything in those two lineups rate as good news. Even as global support for us keeps multiplying, with export commodity prices steadily gaining, domestic activity maintaining momentum and getting broader of beam, we find oil and stronger Rand strangling us.

Last week we heard about credit extension. This recovery remains remarkably credit anaemic, with only 5.1% credit growth, a little faster for households at 7.4% but slower for corporates at 2.7% year on year.

It is natural to assume GDP growth isn’t possible without credit. Yet we have robust consumption growth which is mostly income driven, with some assists from credit (cars, clothing, furniture and apparently many small unsecured lines of credit).

The lack of credit growth strength is most noticeable in property and building industry, with private sector still mostly holding back on fixed investment.

It makes for lopsided growth effort.

Consumption momentum is likely to be sustained, supported by ongoing government spending, rising commodity export earnings and outsized union demands.

This in turn may slowly unfreeze some corporate unwillingness to invest more, specifically consumer-wise.

If electricity constraints, strong Rand and overpriced labour have any stimulus value, it is in the nature of ‘creative destruction’ (seeking cheaper means to circumvent such constraints).

This week we get Kagiso PMI and April car sales. The holiday-heavy month may have tempered some data, but the trick is to see through such aspects.

Still, the first corrosives of the new expansion are fully operational, with 25% electricity tariff increases and road toll impositions joined by sharply higher petrol/diesel prices, with higher food price inflation possibly later on.

These are serious purchasing power erosions. They are likely to make for higher inflation and persistent high wage demands, leading the SARB from later this year to throw its weight in the scales with interest rate increases, prime likely rising from 9% to nearer 11%-12% by late 2012.

Household income gains somehow looked easier to be obtained these past two years compared with what lies ahead in 2011-2012, making ongoing strength of consumption spending somewhat of a question mark.

Still, it remains to be seen how much these forces will erode real disposable income growth (and spending ability).

Overall GDP growth is expected to accelerate modestly from 2.8% last year to nearer 3.5% this year as the strong positive forces keep overcoming negative forces.

But this isn’t as clearcut a dogfight as is usually the case. Credit, electricity, property are all effectively still missing in action. Construction is slow. Private sector is expanding but uneven and hesitantly so, even in the midst of a global commodity boom.

Much depends on household consumers, but also on government to keep spending, hiring, granting rich wage increases and absorbing more social grant recipients.

And much also rides on the outside world to keep pushing up our commodity export prices faster than our import prices, providing us for now with a steadily bigger national allowance (pocket money) with which to please ourselves.

However incredulous it may appear at times, none of the main elements in this Cinderella story have yet faltered or blinked in any way.

Government in election mode is naturally expansionistic with emphasis on job creation.

The outside world continues to be pushed along by Bernanke’s liquidity creation, while major potential crises lurk in major continents (European and American debt, and Arab revolts feeding oil insecurities, with China an uncertain card).

Much of this is Dollar unfriendly and precious metal supportive, potentially explosively so, until the tide turns.

Nobody as yet knows when the high-water mark will be reached and the tide starts to recede. But for now the riches keep piling up, along with inrushing portfolio capital wanting to ride its coattails and firming Rand accompanying it.

With two rich Uncles like these, it is difficult to exercise restraint. Little thereof can be observed in large parts of the labour market, with high real wage demands presented as a matter of course.

Only the discipline of a strong Rand and cutthroat global competition is keeping private employers willing to manage their wage bills, if at the expense of jobs forgone, apparently a societal choice willingly, if often involuntarily, made.

This configuration could potentially last all of 2011 and even 2012. It should ensure that the business cycle expansion, now 21 months old, could reach 40 months.

That would be unexceptional as upswings go, and still far less than half the 1999-2008 expansion.

Still, it is early days. It remains to be seen how the greater world handles its many crises and emergency exits. It may all take longer than imagined, keeping the pot boiling for us, encouraging government, labour and consumers to keep up their good spirits.

Producers will likely duly fall into line.

Source: Cees Bruggemans, FNB, May 3, 2011.

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