Breadth more important

"News flow, spurred by a positive global environment (with the notable exception of oil) coupled with positive local dynamics, continues to be favourable.

Globally, the strong appetite for risk remains. This has favoured the Rand," says Martin Jankelowitz, head of market and economic research at Investment Solutions.

He believes recent numbers lend credence to the sustainability of the positive growth environment South Africa is experiencing.

The strong domestic environment is highly favourable for corporate earnings and the results so far have been more than satisfying. This is the tail-end of the June interim/year-end results reporting season and as Jankelowitz expected, corporate earnings delivery has been very strong.

"The implication is that equity valuations, despite the indices hitting record highs, remain at “fair” value," he says. "The strong corporate earnings numbers are also reflected in the recently released revenue numbers, which, due to strong corporate tax revenue, are coming in well ahead of budget forecasts."

Jankelowitz believes government is in a powerful position to implement key initiatives to further enhance the country's growth trajectory.

"The recent strength in the Rand needs to be viewed in a global context. Year to date, the Rand has depreciated against the Dollar, but has largely tracked the Euro. Although the Rand has also strengthened against the Australian Dollar since around mid-June, it has underperformed during 2005.

Helped by the positive global growth environment and some Rand weakness (since partly reversed), second-quarter 2005 saw GDP grow an annualised 4.8%. To put this into perspective, the consensus expectation was 4.4%, while the first quarter recorded growth of 3.5%.

A notable feature was the breadth of the growth, with all economic sectors contributing positively. Manufacturing was the largest contributor or driver of the growth, after poor first-quarter returns. This is significant as first-quarter economic data flow reflected an unbalanced economic environment.

Local demand was extremely strong but the supply side of the economy was under pressure and detracted from growth.

This deservedly received the attention of the authorities as an unbalanced economy is an unsustainable one. The GDP numbers provide confirmation of the economy's improved growth profile in terms of balance. This is positive and significant as a more balanced economy should also result in SA being able to better manage the trade deficit and quieten concerns that are almost unanimously being expressed.

The numbers strongly support and reflect the “virtuous circle” that Jankelowitz has been promoting for some time -- strong/stable Rand -- declining/stable inflation -- declining/stable interest rates -- support for asset classes and business conditions -- that continues to prevail.

"The country has enjoyed the best part of Rand strength, declining inflation and close to that with respect to interest rates. The final piece of the “virtuous circle” -- a “favourable environment for business conditions” -- is precisely what is manifesting," he says.

Jankelwotiz has repeatedly emphasised in the past few months that this is the key ingredient in ensuring the sustainability of the “circle”.

A favourable economic environment will ensure sustainability, helping the Rand remain stable, which in turn will help inflation and monetary policy remain stable, and so the “virtuous circle” continues. An environment that has enjoyed a structural decline in its inflation and real interest rates is one that becomes more stable, more predictable and more flexible.

"This is a fertile environment for economic growth. But, most importantly, it is an environment conditioned for a sustainable higher economic growth trajectory. Businesses can plan accordingly in a stable environment, and increased investment, foreign and local, should flow," he says.

"The positive fiscal position has powerful implications. Firstly, it reduces the extent to which government needs to borrow money from capital markets, thus reducing the supply of bonds, which is positive for the bond market.

"Secondly, this is an opportune, and appropriate, environment for government to announce and implement initiatives to enhance South Africa's growth trajectory. Government is well positioned to enhance the supply side of the economy.

Scope remains to reduce corporate tax rates further, as well as to increase expenditure in areas that will boost efficiencies, such as human capital development and increased infrastructural investment. Hopefully, an announcement regarding foreign exchange controls will also be forthcoming," says Jankelowitz.