South African data suggests sustainable expansion

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By Cees Bruggemans, Chief Economist of First National Bank.

Except for a disastrous 1Q2012 mining performance due to labour unrest and safety related stoppages, and parts of agriculture suffering drought conditions in some growing areas, most other economic data paint a sustainable if modest pace of expansion into next year.

The SARB leading indicator has been rising over the past nine months after a temporary relapse in 1H2011.

The SARB coinciding indicator has continued to rise, though somewhat more modestly of late, suggesting some loss of growth momentum, but nothing excessive.

Output growth has recently surprised to the upside in retail, wholesale and manufacturing.

The motor trade has continued to see somewhat faster passenger car growth than expected, though export volumes are off.

RMB/BER business opinion surveys have shown revival in confidence in nearly all key sectors.

Even the building trades and civil construction have been registering improved confidence in recent quarters from depressed levels, with real building plans and building completed higher than a year ago, and cement sales 10% up on a year ago.

Private credit growth has steadily accelerated, reaching +9.2% year/year in March 2012 from +8% in February, +7% in January and +6% in December 2011, now nearly matching 10% nominal GDP growth.

Then again, Aussie cut interest rates by an oversized 0.5% this week as its inflation wanes and growth eases, in part reflecting planned Chinese growth moderation and European crisis fallout. To what extent will this also suppress our export growth?

Meanwhile, despite high energy and food price increases, our inflation in recent months has surprised to the downside, with CPI down to 6% and PPI to 7.2%.

Even as the global crisis outlook eases in Europe and in the oil patch, key central banks remain supportive as fiscal austerity bites. Global prospect is for modest growth, easing inflation and generous liquidity.

Despite lingering market anxieties, regarding an abrupt US fiscal cliff (if Obama and Congress prove unable to address Bush tax cut lapses, automatic US spending cuts and deficit lifting), European strains (focused on Spanish finances today, Portugal’s supposed return to market financing by September 2013 and French socialist ambitions for reduced austerity and more emphasis on a growth pact), a Chinese hard landing (a lingering anxiety for some) and risky oil (Iranian pre-emption perhaps postponed but not necessarily indefinitely), the world is seemingly navigating these many icebergs in good spirit.

Though the Fed and ECB downplay further QE or LTRO action their respective economies are simply not growing fast enough, with the US registering 2.2% in 1Q2012 while Europe was mildly recessionary.

That won’t make much of a dent in the 15 million Americans still needing to be reabsorbed, and having to accommodate 100 000 new labour entrants monthly. The same applies to Europe.

Although US and EU inflation has been over 2% since 2010, this may ease as large output gaps weigh on wages and indirect tax and commodity price shocks wear off.

With the US warily facing a possible ‘fiscal cliff’ later this year, and Spanish financial strains potentially deepening enough to require more official support, from EU lifeboats and possibly the IMF, both Fed and ECB may eventually have to resort to more liquidity support.

This prospect should keep underpinning global asset markets, especially equities, commodities and EM currencies, with the Rand good for 7-8:$.

Gradual global Repair and Recuperation in many parts of the world remains the predominant outlook, with only select EU peripherals suffering severe recession and others mildly so, any crisis revival likely addressed by lifeboats, ECB and IMF.

There may be incomplete resolution, whether in Europe (Spain), the US (fiscal impasse), the Middle East or China, but there seems to be sufficient incremental crisis management to keep the wolf from the door.

Thus we keep steadily cruising, as much globally as locally, each country at its own speed, in nearly all cases at less than design speed but well above stall speed, addressing crisis debris or struggling (like South Africa) to get the national act together and seriously improve performance.

Such underperformance is a frustrating reality, for the fearful still offering potential of sudden relapses in the event of unexpected shocks.

Yet despite these unstable foundations, cruising speed prevails, globally and locally, mostly disappointingly slow, with central banks vigilant but remaining inclined to provide more support rather than playing disciplinarians as in more exuberant times.

It takes time to traverse this stretch. Locally, we need to work harder to right-size our imbalances, for which reason emphasis on a greater infrastructure investment effort later this decade is to be welcomed.

The challenge will be to deliver with the limited state capacities we currently have, a legacy from past policies unlikely to be reversed soon.

This creates its own modest expectations.

Yet the infrastructure backlog is so dire many could be underestimating the size and duration of the next fixed investment wave slowly coming into view and likely dominating the second half of this decade, potentially as vigorously as the consumer boom did the last decade.

Source: Cees Bruggemans, FNB, May 2, 2012.

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