Continuing caution despite positive domestic economic signals

Good performances in most market sectors during March and favourable domestic economic data released during the month have failed to generate significant excitement amongst local market watchers who continue to preach caution about the prospects for the South African economy.

Madalet Sessions, economist at BoE Private Clients, says that despite some positive economic signals, private sector credit growth (PCSE) and the broad M3 money supply growth rate in South Africa remain relatively subdued.

“What this suggests is that the inflationary pressure predicted by financial analysts to occur before year end, is not the result of excess demand in the economy,” she says.

On the positive side, Sessions notes that the JSE All Share Index gained 0.52% in March 2011, while the All Bond Index gained 0.49% and cash delivered a positive return of 0.47%. GDP data released during March showed a sharp decline in the current account deficit of the balance of payments to 0.6% of GDP for the quarter, while household consumption expenditure (+4.4% in 2010), especially on durables and semi-durables (cars and clothing) was again surprisingly robust.

“This indicates that higher-income consumers continued to benefit from the 6.5% reduction in interest rates from the peak in 2008,” she says.

Commenting on the release of data concerning government expenditure in 2010, she notes that government departments’ prioritized consumption (+4.6% in 2010) at the expense of investment expenditure which declined by 10.9%.

“We would have preferred the current fiscal deficit to be funding growth enhancing investment expenditure, rather than increases in civil servant salaries, but we view the current countercyclical policy stance as appropriate.

“In general, we remain cautious on the prospects for the SA economy, but would nevertheless recommend a slightly overweight allocation to equities at the expense of cash,” concludes Sessions.

At the provincial level, the Sake24 and BoE Private Clients’ provincial barometers - statistical indices which measure the economic pulse of five of South Africa's provinces (Eastern Cape, Western Cape, Gauteng, KwaZulu-Natal and the Free State) - showed a significant increase in economic activity levels in all of the provinces measured during February 2011.

Mike Schüssler, economist at economists.co.za and compiler of the indices, says that while the provincial barometers indicate that the South African economy is on its way on a new growth phase, a degree of caution is required.

“The current positive conditions will be hit later this year by higher fuel and electricity prices, as well as the possibility of an increase in interest rates,” he notes.

Globally, Sessions notes that continued unrest in the Middle East and North Africa and its affect on oil prices, the costs of the earthquake and tsunami disaster in Japan and continuing sovereign debt concerns in Europe, together resulted in substantial losses in developed equity markets during March.

“While growth prospects in emerging market, including South Africa, appear more certain, the question now is – how much is in the price?