SA unlikely to experience a recession
With economist opinion increasingly gloomy over South Africa’s inflation and growth prospects over the next 12-24 months, there is some positive news on the horizon: the country is unlikely to experience a recession, bolstered by still-strong investment spending by the government and the private sector, as well as fast-growing consumption spending by the public sector.
This is the view of Rian le Roux, chief economist at Old Mutual Investment Group SA, who says recent debate has centred on worries that South African GDP growth could enter negative territory (constituting a recession) towards the end of 2008, largely on the back of slowing consumer spending.
“A full-blown recession looks unlikely given the likely trends in investment and consumption by the private sector, as well as welcome support to key sectors of the economy from the weaker rand,” he says. “Investment growth rates would have to almost halve from their level of the past four years (11.6%), and household spending would have to turn negative (from 7% growth over the past four years) to cause GDP growth to fall below zero.
“Also, historically, negative household spending has proved to be relatively rare. So while consumption growth is expected to slow sharply, an outright contraction is not expected.” However, he goes on to caution that an unexpectedly severe inflation and interest rate shock in the months to come could still produce such an unwelcome outcome.
Some sectors of the economy are certainly suffering and could even worsen further before improving, he acknowledges. “Inflation- and interest-rate-sensitive areas and other businesses that are unable to pass on rising costs to their customers are obvious victims of the current inflationary environment.
“However, it’s worthwhile remembering that some sectors are still faring well. Local businesses competing with imports, exporters, tourism and the mining sector should benefit from the weaker rand, while high global commodity prices will further benefit mines and agriculture.”
In the meantime, the large current account deficit continues to worry investors and policy makers. In the current unsettled global environment capital inflows could quickly dry up, sending the rand weaker again, le Roux points out. However, while the current account deficit is likely to remain large, it is expected to narrow moderately during the course of the year on the back of sharply higher commodity export prices, slowing demand growth and the weaker rand.
And although the local currency has already been targeted for a sell-down by offshore investors earlier this year because of rising risk aversion and the current account deficit – losing far more ground than most other emerging market currencies - le Roux believes the worst of this weakness may be over, provided global conditions do not take another turn for the worse. He is expecting the rand to trend broadly sideways from here through 2009.
“A moderate narrowing of the foreign trade deficit and relatively high interest rates should lend some support to the rand, although the currency remains vulnerable to unfavourable global developments.”
The main challenge to policy makers in the months to come remains inflation. Global commodity prices are still putting upward pressure on local inflation and with electricity tariffs set to rise sharply, CPIX will trend still higher in the months to come. A further risk to the inflation outlook is that wage settlements could accelerate sharply during the course of the year.
Against this background it is very possible that the Reserve Bank will raise rates again sometime later this year, despite the slowdown in the local economy. While such an outcome is certainly not a certainty, consumers should factor such a possibility into their spending and savings decisions in the months to come.
His latest forecast is for CPIX inflation to remain out of the SARB’s target 3-6% range through late 2009, depending on the key inflation drivers of food and energy prices and electricity tariff hikes later in the year.
