The recession is starting to bottom out, but Eurozone economies could dampen SA enthusiasm
The South African private sector has emerged from the recession but the pressure on Eurozone economies such as Greece has put a dampener on early optimism about SA’s recovery as Europe remains our biggest trading partner, says Daryll Owen, Chief Investment Officer for BoE Private Clients.
According to the latest BoE Private Clients' provincial barometers done by Sake24 and economist Mike Schüssler, the private sector economy in all four provinces - rose month on month in January as well as on a three-month basis, which indicates that the downturn has bottomed out.
The barometers show clearly that, although activity levels in most sectors are still much lower than those in January last year, over the past three months, they have begun to rise in Gauteng, the Western Cape, the Eastern Cape and the Free State
On the international front, Owen points out that in the same way that the global credit crunch resulted in a collapse in asset prices and a global recession - a currency crisis could be equally, if not more destabilising.
“Currently there are clear stresses in the system, evidenced by sovereign risk concerns over Greece, Spain, Italy and the like. Our base case is that the euro will survive the first real test of its cohesiveness since its introduction in 1999, but will go through thorough stress tests, the weakest link being tested first”
“The euro is the world’s second reserve currency after the US dollar and it’s also the second most traded currency. In October 2009 there were more than 790 billion euros in circulation, used by more than 550 million people – making it “too big to fail”.
“Failure would constitute a financial earthquake off the Richter scale. It does explain some of the underlying reasons for gold’s relative resilience, as the oldest currency around, and the ongoing investment in precious metal ETFs.”
Schüssler says the "sideshow" currently playing out in Greece and other countries around the Mediterranean - where economies are reeling under massive indebtedness, could also impact South Africa's economic recovery. The negative effect this debt could have on Europe's growth could spill over to SA, as Europe is SA’s largest trading partner. But, he says a single country's downturn won't pull the rest of the globe down, as evidenced by Dubai. However if more countries developed problems, the secondary effect could ripple outwards.
According to the figures released for the last quarter of 2009, the SA economy had real GDP growth of 3.2% q/q.
Owen says the positive GDP momentum looks to be sustained, with the February PMI coming in at 60.4, after the 53.6 reading in January. But he says credit, as yet, is not contributing to these positive trends in GDP.
“Money supply growth continued to ease. Credit extended to the private sector (PSCE) declined 1.1% y/y in January; the 3.8% y/y increase in mortgage advances offset by credit extension to corporate borrowing declining 5.7% y/y and instalment sales declined 1.4% y/y.”
Against this background BoE Private Clients has maintained its view of a slow recovery for the South African economy and its GDP forecasts for 2010 and 2011 are 2.4% and 3.2% respectively.
“Equities have discounted most of this recovery, and after the good run in 2009, we expect only moderate returns from listed shares in 2010, “ he said.
Schüssler says although there is a risk of a double-dip in the South African economy, it does not mean that the country should expect another recession this year. He says that governments worldwide will have to raise interest rates and curtail the extra expenditure of the recession. The reversal could hold back economic recovery somewhat, but the recovery by that time might have sufficient traction.
