Looking good

Kevin Lings – an economist at Stanlib – discussed some of the key economic issues, locally, because there is more excitement and positive news.

Lings says that there are still sunny days, while it remains gloomy internationally, although there will be some temperature easing later in the year.

Internationally world growth is expected at around 3.5% for the year, down from the revised 4.8% for 2004. Unfortunately the 3.8% is good but below the average.

Chinese GDP numbers at 9.5% for the year. There will be a slowdown to 8% in 2005. Exports are up and growth will remain robust. What this does to commodity prices is significant. These will remain good. They have peaked but there wont be a significant slowdown.

The USA remains the biggest contributor to the world’s GDP, responsible for 30% of the world’s economy. There seems to be a nice pickup in the last quarter says Lings.

On the manufacturers side, product ion is above the peak, while employment is down – with the majority of the jobs having gone offshore – the USA is more efficient and are unlikely to win the jobs back from the Chinese.

Interestingly there has been a surge in liquidity, with corporates sitting on liquid assets, waiting for the upturn. Inflation has trended higher, but not at a level to raise concerns.

The Fed will have to raise interest rates incrementally. They are normalizing the economy, and for no other reason, says Lings.

The problem with the USA is the imbalance – the US trade deficit – it is a key issue, and it keeps getting worse, and bigger. The dollar has come under increasing pressure, in spite of increase in imports, while exports are moving sideways.

A huge amount of money has to be drawn from the world to finance the debt. The USA has to draw about 30% of world’s savings to service the debt, which could lead to some dollar weakness.

SA continues to do well – there has been an acceleration in growth – there is strong retail sales growth and no sign of a letup – there won’t be a continual growth rate – it will come down.

Housing is still showing substantial growth. Prices have caught up from being undervalued – now at fair value. Mortgage lending is moving up substantially, while the credit side is growing and will be a feature this year. Credit has been asset-based, leading to asset inflation, and no sign of a move to other inflation.

According to Lings the SARB shouldn’t drop interest rates based on this.

Insolvencies seem to be at an all time low- there doesn’t seem to any distress.

The key feature is real consumer spending vs disposable income. Information shows that inflation has been coming down and wages have been exceeding this.

Consumers aren’t aware that they have more disposable income. As the interest rates come down, so consumers slowly realise that they can spend more, playing catch up. This will eventually bite into savings levels.

A way to counter this is to increase employment – but not enough is happening. The rate of growth will slow – although it is still substantial at about 4% growth in income.

Lings is not expecting a lot of tax cuts in the budget but there will be expenditure to increase employment and growth. He (Manuel) has scope, due to numerous issues, including tax collection and retail activity.

Inflation wont be a problem either. It should be 3.8%, with some discussion in June by the SARB. They should be flat for 2005, although there will be some pressure.

The balance of payments is the one fly in the ointment. Local manufacturers are in pain, with the strength of the rand the main culprit. It’s not a disaster, but it remains an area of concern.

The SA trade balance is deteriorating, although the SA capital account is booming. There is a huge amount of money coming in, most of it unreported, and aimed at foreign purchases of equities last year. The country (SA) is an easy story to sell, at the moment.

He expects 4% growth this year, slowing into 2006. Fixed investment will grow while inflation remains in the 5% band, trending up to 5.6%.

Focus on employment growth must be the main area of attention.

Health warning – The comments in this article should not be construed to be advice, but are opinions and analysis by economists, fund managers and senior management.

Making investment decisions based on published results of any investment vehicle may not be a good idea.

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