South will not escape the effects of the global slump, but is partly isolated - Conditions for many set to improve in second half of year

Despite slowing growth and rising unemployment, South Africa is likely to weather the very difficult worldwide economic conditions ahead for 2009 better than many other countries, with conditions for many South Africans improving in the second half of the year, according to Old Mutual Investment Group SA (OMIGSA) chief economist Rian le Roux (pictured).

“South Africa is closely tied to the global economic cycle, which has experienced a drastic slowdown in recent months,” says le Roux. “The global slump has been unexpectedly severe – the worst since the Great Depression in the 1930’s - and we can’t escape the fallout. We’ve been hit by falling commodity prices, declining exports, investment outflows and a weak rand, all of which have slowed our GDP growth and caused severe recessions in certain sectors. Yet our financial system has not seized up, our banks remain sound, and we have been spared the big corporate collapses that have become an almost daily event abroad.”

He attributes South Africa’s relatively robust performance to several factors, including the early and substantial rise in local interest rates (ahead of most other countries) and the National Credit Act, both of which helped dampen bank lending and consumer borrowing and spending over the past two years, thus avoiding the credit-led bubbles seen overseas. Exchange controls limited local banks’ exposure to international credit risk. Also, the weaker rand has acted as an automatic stabiliser by curbing imports and supporting exports.

“So while in the first half of the year we will still experience some very difficult conditions with some sectors in deep recession (like autos, residential construction, mining, commodity exporters and small business) and job shedding in some instances, by the second half conditions should start to stabilise,” says le Roux. “Lower interest rates, the lower petrol price, falling general inflation and some likely tax relief should support consumer spending and boost real household income.

“Importantly,” he adds, “the government’s infrastructure drive should underpin the momentum for economic growth and help prevent a contraction in GDP for the year– we expect GDP growth of a little over 1% in 2009 after about 3.2% in 2008. Although this is very slow growth, it is far better than the contractions forecast in many developed countries this year.”

Thanks to falling global commodity prices, technical ‘base effects’ and the re-weighting and re-basing of the inflation measure by Stats SA in January, le Roux expects a steep drop in January’s inflation rate to around 7% y/y from about 10½% y/y at the end of 2008. And he is forecasting further falls in the months ahead, so that CPIX comes within the South African Reserve Bank (SARB)’s 3%-6% target range by mid-year and remains largely within this range through 2010.

Stats SA’s long-awaited revision of the consumer price index (CPI), which comprises a re-basing back to zero and a re-weighting of all components, takes effect with the official January 2009 data (released in late February) and will result in a reduction of as much as two percentage points in CPI, notes le Roux. “In the eight years since its last revision, consumer spending patterns have changed considerably, resulting in a lower weighting for food in the index. This is o­nly o­ne significant change among many.”

With inflation looking very much tamer and the economy slowing fast, the SARB should be able to cut interest rates by a further 250 basis points (bps), or even more, in 2009. The chance of a 100bp reduction at the Monetary Policy Committee meeting in February is high, le Roux says, given the intensifying local downturn and improved inflation outlook.

However, risks to this improving outlook remain high, he cautions. Investor jitters and general global uncertainty continue to put pressure o­n the value of the rand, which remains a key risk for inflation prospects in 2009. “The chances of a protracted and/or even deeper global slump are real,” warns le Roux. “Should global conditions deteriorate more than expected, this could lead to further rand weakness, delays in interest rate easing, more widespread job shedding and a slump in private investment.

“Thanks to global governments’ unprecedented policy interventions and obvious determination to prevent such an outcome, the chances of this chilling scenario are limited, but you can’t rule it out,” he concludes.