SA - on the path to recovery

Every economic indicator that is released these days, points to the South African economy being well into its recovery path after a relatively short recession in 2009. While it is not a traditional or V-shaped recovery, it is nevertheless intact and, more importantly, it appears sustainable.

Unlike many developed countries, South Africa’s banking system is well-regulated, which is probably the main reason that it didn’t suffer the same fate as many banks in the US, the UK and Europe. As a result, South Africa didn’t require the same degree of stimulus to its economy as these countries and its economic recovery occurred more “naturally”.

Having said this, our projected economic growth of 3.8% in 2011 and 4.3% in 2012 falls short of what is required to make meaningful inroads into our chronically high unemployment rate of around 25%. A sobering statistic is that if those workers who have become disillusioned and thus have stopped seeking work are added into the mix, that number swells to 37%.

Little wonder, then, that President Zuma made employment the cornerstone of his State of the Nation speech in February 2011. Government obviously recognises that unemployment is the greatest obstacle to fulfilling the aspirations of many South Africans and has indicated that it is ready and willing to address the problem head-on. Finance Minister, Pravin Gordhan, echoed these sentiments last year when he called for a target of 7% economic growth over the next few decades to be set.

But while such lofty ambitions are not only desirable (some would say essential), they are not easy to achieve in isolation. This is why government has invited the private sector to participate in creating new jobs via tax and other incentives. We wait with anticipation for the national budget on February 23 to see the finer detail of what was mentioned in the State of the Nation address.

Apart from unemployment, inflation may start to become an issue later this year or early 2012. In the wake of the global financial crisis, inflation has been relatively benign but certain factors, including the soaring oil price, are already beginning to have an impact on the South African economy.

And while inflation is still well within the target range of 3% to 6% as set down by the Monetary Policy Committee of the Reserve Bank, it is likely to begin moving upwards shortly. Apart from the impact of surging oil and food prices, significantly higher administered prices such as Eskom tariff hikes will also start impacting from mid-year. However, interest rates are likely to remain fairly flat for most of this year, with hikes likely to occur from the first quarter of 2012.

The Rand exchange rate has experienced a rapid and profound reversal of fortune in the first few weeks of this year. It has gone from being one of the best-performing currencies in 2010 to being the singularly worst performing currency this year. While this will be welcome news to those who had called for a weaker rand in order to promote export growth, it will, if sustained, lead to higher imported inflation.

Encouragingly, consumer spending, which accounts for around 60% of SA’s GDP output, is looking much better. Not only is retail sales growth improving, but trading updates from the retailers suggest that consumers are starting to use credit, albeit slowly, for their purchases. But the high indebtedness of consumers, coupled with the requirements of the National Credit Act, mean that credit demand is likely to remain muted until much further in the economic cycle.

Despite risks to price stability, it is apparent that SA’s economic growth, while modest, is gaining traction. Our economic fundamentals are good but more still needs to be done, especially on improving infrastructure. Government is acutely aware of this and is making advances in the right direction.

And in the longer term, with our newly-acquired membership of the BRIC alliance, South Africa must surely benefit from greatly enhanced interest in the African continent generally.

NB: * The above opinion piece is authored by Chris Gilmour, Analyst from Absa Asset Management Private Clients.