SA Q4 GDP points to “front loading” rate cuts; consumer relief ahead - Investors should avoid over-reacting to bad news

Today’s poor data showing a 1.8% q/q contraction in South Africa’s GDP during the fourth quarter of 2008, the first such quarterly decline in more than a decade, confirms that the economy has been hard hit by the combination of the rise in interest rates during 2006/8 and, more recently, the global economic slump, according to OMIGSA chief economist Rian le Roux.

However, Old Mutual advises that individual investors, pension fund trustees and advisors should avoid over-reacting to this piece of bad news and stay focused o­n the longer-term picture.

“We had expected an annualised decline of -2.0% in GDP for the quarter, so the actual data was a little better than our own forecasts,” notes le Roux. “Nevertheless, this is the first time since the third quarter of 1998 that the economy has actually contracted. Looking forward, prospects are not promising. The deepening global downturn will continue to negatively affect South African exporters, while the sharply weaker outlook for the world economy and uncertain prospects locally will likely cause local companies to postpone or even scrap capital expansion plans.”

A closer look at the GDP data reveals wide sectoral differences. While the large manufacturing sector contracted at a record 21% annualised pace and electricity output by -3%, agriculture grew at a 17% annualised pace, construction 12%, government services 4% and finance & real estate by 3%.

Today’s GDP data increases the chance that the South African Reserve Bank (SARB) will lower interest rates before the next scheduled meeting of the Monetary Policy Committee in April. “Depending o­n this week’s January inflation data, the SARB could announce such a decision by the end of the week. Given the downside risks to the economy, ‘front-loading’ interest rate cuts is an attractive option.”

While the broader economy is set for a difficult period ahead, consumers, who bore the brunt of the adjustments in 2008, should experience some relief in the months to come. While job shedding by companies is an undeniable risk to many consumers, lower interest rates, increased government social transfers, lower petrol prices, tax relief and a slowdown in general inflation should provide relief to most.

Meanwhile, Old Mutual Corporate MD Seelan Gobalsamy (pictured) says that within the retirement fund industry, it is trustees, advisers, consultants and intermediaries who have the responsibility to remind fund members and employers that retirement investment is, in general, a long-term plan.

As such, in the face of market volatility and continuing bad news o­n the economic front - like today’s GDP data - they need to avoid making decisions based o­n short-term factors and stay focused o­n the bigger picture.

However, he cautions that trustees may need to give special attention to the needs of members within five years of retirement. These members do not have time o­n their side, so if the trustees do not proactively manage the investment risk, some disaster management may be required.

“Investors or fund members must avoid making decisions based o­n single events or individual pieces of bad news,” advises Gobalsamy. “Fund investment policies must be reviewed regularly to ensure the same prudent, long-term approach is upheld. Most importantly, members must be advised of the likely short-term drop in value that may occur, and be warned against the risk of exiting their investments prematurely as a result.”

He says it is also important that retirement fund members are assured of the stability of the institutions managing their funds. "While the international crisis has taken its toll o­n overseas financial institutions, our local financial institutions have proved resilient," he concludes.