South Africa’s prospects for 2012
By Cees Bruggemans, Chief Economist of FNB.
Evita Bezuidenhout probably put it most clearly. Freely translated, she had this to say about the year ahead:
“We won’t have much of a government this year because they are fighting so much among themselves they haven’t got time for much else. It is going to be a healthy year for South Africa, but we will all have to work hard at it to make it happen. It won’t be given to us on a platter……” (Die Burger 3 January 2012)
This is a remarkable insightful view. We have to struggle with what we have, however imperfect, especially infrastructure. Most of us will be giving it our best, hoping we won’t get a global wave hitting us sideways and overturning our little sloop.
In so many respects, though, we could be getting lucky.
Our politicians may not be interfering too much in the economy, as Evita remarked so clear-eyed, because they will be preoccupied with other things.
And the world financial system and economy won’t collapse. That at least is the view of German Finance Minister Schaeuble, who opinioned in the closing days of 2011 that there won’t be a market collapse in 2012, things remaining ‘controllable’ (in Europe).
The same sensation doesn’t quite prevail regarding the US, where politicians extended the payroll tax cut for just two months past Xmas, so that the issue pops up again right in the middle of electioneering season.
If last year was written off fiscally in the US, this year will be an even bigger existential battleground as opposing philosophies pontificate while the economy struggles on.
Former Fed chairman Greenspan suggested in the Financial Times last week that the US is experiencing declining education standards implying a future productivity downshift while facing unfunded entitlement promises and bifurcating politics cementing gridlock. Not a promising future.
Still, she is a big ship, capable of sailing onwards under her own stewardship for the time being. Mainly a matter of private enterprise and true grit.
Though US households are still deleveraging, their savings rate has peaked, housing is bottoming, corporates have strong balance sheets and are achieving record earnings, innovation is as richly experimental and productive as ever, and the imaginative monetary policies of Ben Bernanke are succeeding in keeping rates low, investment portfolios repositioning and cash flowing.
An even bigger existential challenge is playing out in Europe where fiscal austerity and bank repositioning (keeping credit tight) keeps uncertainty high and spending defensive, likely causing core Europe led by Germany to barely expand this year and some peripherals to keep experiencing deep recession.
Still, global growth will stay supportive, structural reforms are in the works nearly everywhere aiming to resuscitate growth dynamics, and the ECB and EU politicians will likely keep the overall show afloat as implied by Schaeuble.
China has slowed, but policy is expected to be loosened this year, keeping growth near 8-9% rather than the usual 9%-10%. China’s existential challenges are very real, too, but may play out over a longer timeframe.
The Middle East may see regime changes favouring more conservative politics, and nuclear-bound Iran could cause consternation, potentially impacting on oil prices.
Modest US growth, and still high Asian growth, could keep oil demand lively, and when coupled with supply-side concerns, push Brent oil towards $120-$130/b.
That, along with mildly falling EU demand, would be a corrosive for global growth, keeping things slow in 1H2012 but hopefully reviving anew from 2H2012.
All of this could be good for gold, with lingering anxiety and uncertainty keeping people on edge and looking for safety, except EU bank liquidity issues may squeeze gold as it appeared to do in 2H2011.
As to currencies, the Euro could be under pressure from sovereign debt concerns and ECB liquidity support, while the Dollar should be under pressure from Fed liquidity support (but countered by safe haven inclinations?).
Commodity producers may be getting past their 2011 adjustment, with Asian growth pulling and rich country liquidity actions boosting prices anew.
Along with supportive domestic actions, this global picture suggests reasonable EM growth, good commodity prices and strongly performing currencies against the majors outside of crisis moments.
With our politicians and the global context neutral to supportive, South African households may continue to grow nominal income at 8%-10%. With inflation averaging near 6% this year, it leaves enough real disposable income to continue the consumption-driven expansion.
Also, public and private fixed investment may continue to give just enough lift to maintain GDP growth near 3%.
Macro policy will be an important support, with the fiscal deficit this year marginally lifting to 5.5% of GDP, real interest rates negative (considering a repo of 5.5%) and the Rand at least 15% weaker near 8:$ instead of 7:$ (as long as this prevails).
Such modest growth can still generate at least 200 000 jobs annually, half in the public sector, thus keeping our long-term structural transformation alive.
Source: Cees Bruggemans, First National Bank, January 9, 2012.
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