SA economy cools as global chill finally hits exports, business investment and consumer spending

With the world’s major economies slowing rapidly and local consumer and investor confidence sapped by negative headlines, the South African economy is now also feeling the chill, meaning 2012 and 2013 will see continued subdued growth and limited job cre

Speaking at the OMIGSA quarterly press conference today, Els said that the contagion effects from the European crisis and concerns over slower growth in Europe, the US and China, in particular, had finally begun to take their toll o­n the local economy. As a result, he has downgraded his 2012 GDP growth forecast for SA to 2.8% from 3.0% previously, and now expects interest rates to remain unchanged through the end of 2013.

“Consumer spending, which has underpinned our GDP growth for the past two years, is starting to flag, with household spending growth slowing to o­nly 3.1% annualised growth in the first quarter of the year, compared to 5.0% in 2011. At the same time, business investment has decelerated to 1.8% q/q from 5.3% in 2011; both individuals and businesses are suffering from a dip in confidence. Consumers are tightening their belts in the face of declining real incomes and continuous bad news, and businesses are postponing investment due to increasingly uncertain business conditions. While this is not a ‘crisis’ of confidence, it is worrying for our growth prospects going forward.”

The collapse in South Africa’s manufacturing Purchasing Managers Index (PMI) to 48.2 in June was also a concern, o­n top of the already-weak mining sector, Els believed. “Although we see some recovery in mining activity this year, our manufacturing sector could come under more pressure should the European situation deteriorate markedly going forward.”

Moreover, added Els, our exports are being hit by outright recession in key trading partners like the UK and Europe, and anaemic growth in the US. “The trade deficit has deteriorated sharply over the first quarter, widening to nearly R9.0 billion, and this has pushed the current account deficit to almost 5.0% of GDP. The April/May trade figures point to yet another large deficit in the second quarter. While the deficit has so far been adequately covered by capital inflows, we are concerned about the size of the deficit and the risk of further widening, as exports are likely to continue to wilt under falling commodity prices and weaker foreign demand for our goods and commodities.

“The second quarter has been the weakest in the current global expansion, as shown by the manufacturing PMI’s of the US, Japan and China hovering at 50 - or below 50 in the case of the Euro-area; below 50 indicates a contraction in manufacturing. The JP Morgan All-Industry PMI, which covers all the major economies, was also at 50.3 in June, down from above 55 at the beginning of the year. And there is a strong likelihood that global growth will slow even further this year – just look at the US, where the market expects GDP growth to slow to 1.5% y/y in the second quarter from 1.9% in the first quarter.”

On the positive side for South Africa, he pointed out, public sector investment has started to accelerate, rising by 11.7% in the first quarter of 2102 compared to 2011’s meagre 2.9% pace. While much of the spending has come from public corporations, with a focus o­n transport equipment and machinery, some has also stemmed from general government. There have been slow investment recoveries in building (both residential and non-residential) and construction as well.

At the same time, the decline in inflation to 5.7% y/y in May has also brought some welcome relief for consumers, noted Els. “The threat of inflation has virtually vanished from the global economy. SA food inflation has dropped fairly dramatically from its peak of 11.6% y/y in December last year to 6.8% y/y in May, and we’ve all seen crude oil move from $125 per barrel to under $100. We expect SA’s inflation to decelerate even further in the coming months –CPI should to dip to around 5.4% y/y in June/July and we have reduced our year-end forecast to 5.3% y/y from 5.5% previously.”

While the improved inflation outlook has brought with it rising expectations of an interest rate cut by the SA Reserve Bank (SARB), Els cautioned against such a move. “Current conditions look very similar to 2001, when the SARB reduced rates excessively and sparked a surge in consumer demand and accompanying spike in inflation…and so the bank was then forced to raise rates again more sharply than was desirable. For the economy as a whole it’s preferable to implement gradual and moderate interest rate moves in order to better manage business and consumer sentiment and expectations.

“We are now expecting interest rates to remain o­n hold throughout this year and all of 2013 (previously we saw rates rising in the middle of 2013) due to soft consumer demand and easing inflation concerns, although there is the small chance of a cut later in 2012 should our growth slow dramatically. While the SARB is worried about the contagion effects of the global slowdown, in the shorter term it is the widening current account deficit and the risk of further rand weakness (as happened in 2001) that is causing them to resist another rate cut.”

Concluded Els: “So although we are finally seeing the right moves by governments around the world to contain their fiscal crises, with the eventual agreements in the Eurozone and further monetary easing in many countries including China helping to reduce market concerns, the o­ngoing global growth slowdown remains a major worry for South Africa. Market volatility will also remain elevated while more bailouts are possible in the Eurozone, and a key question-mark hangs over the US, where the impact of inevitable fiscal tightening will o­nly be known next year.

“However, our economy is not likely to fall off a cliff; we expect the various governments to continue to ‘muddle through’ and avoid global recession. As a result of the unexpectedly sharp slowdown locally, we have downgraded our SA growth forecasts to 2.8% for 2012 (from 3.0% previously). We still expect 3.0% in 2013. We see subdued growth, limited job creation, easing inflation, flat interest rates and a volatile but generally sideways rand lasting through the end of 2013.”