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A narrower path - the local economy predicted

01 February 2006 Angelo Coppola

Goolam Ballim, chief economist at Standard Bank and his scuffed-up and roughed-up crystal ball, looked back before he looked forward, and judging on the forecasts they predicted at the beginning of 2005, his accuracy and that of his team, means that he is

The prime rate was predicted at 10.5%, and his was spot on, the rand dollar was predicted at 5.77 and it closed the year off at 6.33. The pound rand was spot on at 11.50.

The country will show a robust and balanced growth rate although it will be along a more narrow path.

He maintains that there are some central themes, for local and international economies for the year ahead. There was a currency liquidity glut last year, and the USA was no longer the marginal supplier of liquidity growth for the globe, which raised world money supply.

This would suggest that some clues presented in December when the ECB raised their rates. They will tighten money supply even further in 2006. There will be less liquidity with impacts on the bond markets and some burn from the markets and credit spreads may widen.

Two economies will dominate and drive global economies and gdp. This will provide a good tailwind, with a continued good performance from the USA. The transition means that yield curves will get steeper. The global economy will expand by 4%, led by Germany and Japan. Germany could expand at double the rates from last year.

On the emerging markets front China and India will ease somewhat. The export dynamic will change. Policy directed growth will slow. In India there is leveraged consumption and household spending will ease.

Locally, households and liquidity are issues. In 2004 and last year the consumer was a meaningful contributor. The contribution was a significant and acted as a halo. Incremental household spending was credit spending. Are consumers over-leveraged, and will there be a slowdown?

The capacity to take on debt has eroded, although it does still remain healthy. Consumers can afford debt because money supply has been discounted. Credit and supplier spending was pegged at R100bn in 2004, R125bn in 2005, and R70bn in 2006, which signifies a deceleration in credit for 2006.

As it is inflation and inflation risk premium and expectations have been dampened by the strong currency. The stabilizing effect is that income growth is fairly benign, at 3%. Bear in mind however that household demand constitutes 2/3 of the local economy.

On the policy front and in terms of the policy options, the Finance minister has never had it so good. He has a wide range of options open to him, and he is almost spoilt for choice. Ballim anticipates that there will be some relief will go to corporates, and relief for low and middle income individuals.

The fiscal policy will be more than mildly aggressive, he predicts.

House price and stock market gains should not be discounted in terms of the wealth effect, and he estimates that for every additional rand returned at least 2 to 3 cents is spent in the local economy. There are employment gains, to, coupled with real income growth.

Transformation is showing traction and consumer spending patterns are showing structural change. There has been an increased contribution from black consumers. 2001 was the epoch, when black consumers became the biggest consumers in the local economy. This was the turning point. By 2010, 50 cents on every rand will flow from black communities. There is a different market and one that will require different approaches.

In terms of investment, Ballim says that government has identified the dampeners to economic growth. They do also understand and are pragmatic about what to deal with first. They arent attempting to fix everything. China is an example. They have got scale and cost sorted out. They have left the other issues alone.

Government is also quick to identify the easy fixes. What are the costless and near costless actions that can result in positive change. Look at the scrapping of the visa requirements between Mozambique and SA, which has resulted in a massive surge of travel between the countries, easily offsets the revenue generated by visa sales.

Tempering currency volatility is also receiving attention, and there is a focus on local government.

On the fixed capital issue the private sector and public sector were equal partners in 1980 each contributing 50c in the rand. This has changed substantially and the private sector has up until recently been the biggest investor in this area. The public sector has essentially gone on a fixed investment strike.

GDP growth is expected to stabilise at 4.9%; while the investment dynamic is showing signs of growth and thus leading to some balance, as household spending will come down slightly. Government final consumption will come back a little to 4.5%; gross domestic expenditure will grow by 6.1%. Exports will drop to 4%, while imports to drop to 8%; the currency is showing a trending rand, to 6.37against the dollar; and 11.43 to the pound.

There are several global caveats. The world is a more dangerous place, and much of the issues of 2005 have not been resolved. The US consumers will be reigned in. There will be a rebalancing and hopefully it wont be dramatic. US consumption and their housing market tanks there will be repercussions.

He expects a growth rate in China of anything less than 7% as a knock, coming from close to 10%.

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