South Africa: Temporary headwinds playing out

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By Cees Bruggemans, Chief Economist of FNB.

South Africa and the world at large are facing down some temporary headwinds that should ere long give way to more benign tailwind conditions.

Or so some of the reasoning goes.

Sure, the US remains mired down by defunct property markets, huge unemployment deadweight, ongoing financial deleveraging (increased private saving) even as public fiscal cutbacks are underway.

Peripheral Europe is far worse affected but is by far the smaller EU contributor, with core Europe doing well and reducing unemployment.

Germany is doing so well it plans to cut taxes in 2013 (which just happens to be a crucial election year).

Japanese output fell off drastically during 1H2011 on account of the tsunami and its devastating aftermath.

China has been cyclically cooling off (but with effective growth remaining near 9% and credit per unit of GDP hardly falling off despite impressive policy actions).

Quite a bit of the US growth falloff in 1H2011 was due to temporary factors, including defence spending delays and weather interference, but also Japanese tsunami fallout (bigger than anticipated) and drag effects from higher oil and food prices (and the inventory distortions all these brought in their wake).

But most of that is getting wiped off the table now.

* US defence spending will catch up

* US farmers are reportedly planting 10% more maize acreage and its price late last week fell by 15% in one day (though some question the acreage estimates and Western Europe is now suffering drought)

* Oil prices are off following IEA intervention to replace lost Libyan output, aiming to get through the critical high-driving summer season, releasing 2mbd for 60 days from strategic stocks (reducing the headwinds holding down global consumption)

* Japanese industrial output is roaring back, by next month expected to have recovered three-quarters of its March 15% decline despite being electricity constrained.

In addition, China seems to be readying to open the policy taps anew as it goes through a major leadership change. The US may maintain an accommodative monetary policy even into 2013 (also because her fiscal policy is contracting now). Europe is expected to tighten further this week, rates rising another 0.25% to 1.5% (but then entering a long pause?).

Thus the ‘disappointing’ 1H2011 growth performance in rich countries may shortly give way to somewhat better output and less demand-constrained conditions, with emerging countries continuing robust growth.

South Africa is facing something similar.

Credit growth has fallen off anew, from 6.2% (April) to 5.2% (May), with household credit still near 7%, but corporate credit easing again below 4%.

In an economy growing nominal GDP by 8%-10%, such credit undersupply is a growth headwind.

Just so electricity supply unable to grow much more than 1% within severely constrained reserve buffers, rail infrastructure limiting commodity export volumes, and a 20% overvalued Rand making things difficult for export volume recovery.

Also, metal-workers go on strike today, demanding 13% plus benefits while being offered 7%, with output lost deducted from 3Q2011 growth.

Though income growth remains robust, higher inflation may temper real gains and probably real consumption.

This may be offset, though not much, by slightly faster fixed investment spending (at the decimal point level).

The Kagiso Purchasing Managers Index fell off again in May to 53.9 (from 55.1), reflecting mainly the Japanese output falloff which should reverse in coming months.

Though our fiscal position is also consolidating with rising tax revenue eroding the budget deficit already below 5% of GDP, the SARB keeps signaling unwillingness for now to tighten policy.

The inflation shock hasn’t as yet got legs, the domestic recovery remains unbalanced and underperforming and global risk potential remains scary and advises caution.

Thus South African demand and output continue to evolve steadily, if with periodic hiccups (such as recently seen in manufacturing).

Overall growth momentum near 3.5% may not be as high as wished for while its mix is still too unbalanced (too much reliance on consumption, too little on fixed investment and export volume recovery), but at least our recovery continues steadily.

Unlike the US (unemployment, housing), Europe (peripheral austerity) and China (anti-inflation policy tightening), South Africa’s recovery remains well-supported by global windfalls and domestic policy actions.

Thus we are about to start the third year of expansion.

Even though fixed investment will likely be late in adding more to growth, faster private spending may add to momentum from 2013 and infrastructure boosts may become more noticeable thereafter, potentially extending the current expansion.

But GDP growth will likely remain constrained near 3.5%, with formal job growth only 2% plus (some 200 000 annually).

Later on this decade things may speed up somewhat if global conditions remain supportive and fixed investment provides bigger boosts to demand while debottlenecking critical energy and transport nodes.

This young expansion may yet become a long-winded one, not unlike 1999-2007, but hopefully this time without leveraged excesses.

Source: Cees Bruggemans, FNB, July 4, 2011.

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