Doom and gloom aplenty as domestic GDP forecasts crimp further
You do no need to be an economist to form an opinion on South Africa’s business environment. A quick look at the news feeds confirms we are in deep trouble. Forget for a moment the global financial malaise with which our international trading partners are
In their October 2012 media briefing Absa Capital outlined the local and global obstacles that the country would have to address going forward. Jeff Gable, Head of macro and fixed income research at the group, observes that business confidence, manufacturing confidence and services confidence remain weak globally. He then handed over to Absa Capital SA Economist, Ilke van Zyl, to explain why the group’s 2012 GDP growth forecast had slipped from 2.6% to 2.5%. Their forecast for 2013 was also revised downward from 3.5% to just 3%.
A fifth of our economy is in the doldrums
The best way to assess an economy is to break it up into parts. South Africa’s manufacturing production, which accounts for approximately 15% of GDP, is under threat due to an unprecedented slump in international demand for goods. Debt woes continue unabated across the Euro-zone, while the economic slowdown in China (although moderate) has hugely negative implications. China accounts for as much as 15% of South Africa’s exports. It is little wonder then that Van Zyl summarises the outlook for this segment of domestic GDP as “gloomy”. Apart from slight improvements in the construction and personal services measures almost all sectors of the domestic economy are under pressure.
Given this outlook, how could Absa Capital forecast 3.2% GDP growth for Q2 2012? The answer lies in the mining sector – which accounts for approximately 45% of our exports and 5% of GDP – and weighed in positively on overall GDP in Q1 and Q2. The expectation is that the solid start to 2012 will come unglued as the impact of labour unrest in the gold and platinum sectors filter through. Van Zyl observes that the gold sector contributes 17% to the mining component of GDP while the platinum sector weighing in with 27%.
“A weak GDP growth number going forward is simply a consequence of a fifth of the economy under pressure,” says Van Zyl. And the impact of slower growth is already being felt by consumers. Household consumption has already declined from 5% last year to 3.1% in Q1 2012 and just 2.9% in Q2. All in all South Africa is facing a very scary consumer debt picture. “The consumer is increasingly vulnerable as indicated by the debt to disposable income ratio creeping up from 75.6% to 76.3%,” she says. “To make matters worse much of this debt growth is due to increased consumption”.
Have we shackled the inflation monster?
A couple of months ago the outlook for domestic CPI was bleak. White maize (up 40% at one stage) and wheat prices (up 25%) were increasing hand over fist, placing pressure on food price inflation worldwide. Most analysts expected CPI to break through the upper level of the Reserve Bank’s 3% to 6% target range as a result. The good news is that this price pressure has dissipated in recent months. Although food price inflation could spike to 8% in Q1 2013, Absa Capital expects the overall CPI to move up only slightly, averaging about 5.4% early in the New Year. “Core inflation is well contained and will remain around 5% or lower going forward,” says Van Zyl.
Provided the inflation outlook remains stable we can expect “lower for longer” interest rates. Absa Capital believes that interest rates will remain unchanged until late in 2014 and argues the case from a “rates cannot go lower” standpoint. There are two key factors informing their view. First among these is the widening current account deficit, which could widen further in the event rates are cut. This is something National Treasury would rather avoid. The second consideration is that the current account depends on portfolio inflows to finance the deficit.
Global capital flows to higher interest rates at the moment, which will again stymie calls for a rate cut, regardless of the domestic economic outlook. “Given the gradual uptick in inflation going forward, on a real interest rate basis monetary policy will be eased,” says Van Zyl. “From here onwards we see real interest rates remaining negative until late next year”. The Reserve Bank can only move once economic growth is back on track and it is comfortable that inflation is driven by demand pull factors. Absa Capital expects that “move” will be a rate hike in Q3 2014.
An educated guess at currency “crosses”
There is a strong link between domestic inflation expectations and the level of the rand against the currencies of our key trade partners. Since the bulk of our imports and exports are priced in dollars and Euro these are the two “crosses” we are most concerned with. Mike Keenan, Currency Strategist at Absa Capital, says that the rand is trading quite consistently in the R8.05 to R8.50/dollar range, a level it seems able to hold despite the raft of negative macroeconomic and socio-political factors at play locally.
The rand has held its ground despite international ratings agency downgrades and the alarming widening of the current account deficit. Factors that should have resulted in a moderate strengthening of the currency have largely been ignored too. Keenan notes that the inclusion of South African bonds in the Citibank World Government Bond Index (WGBI) should underpin the rand. The on-going stimulus in developed world economies such as the US, UK and Japan are also positive for the rand over the near term.
“Against this backdrop it seems highly likely that the rand will oscillate in the abovementioned band for quite some time,” says Keenan. The latest forecast for the currency, based on Absa Capital’s house view and Reuters’ surveys of economists has the rand strengthening to R7.95/$ by the end of October 2012. This strengthening hinges on WGBI flows coming through as well as the unwinding of foreign exchange hedge transactions implemented by international fund managers as they snapped up domestic bonds over the past few months. “But by December 2012 we expect the currency to slip back to the R8.30/$ level due to domestic risks such as wage strikes and the possibility of further ratings agency downgrades,” he says.
The good news is that the emerging market “story” should dominate longer-term currency movements. Keenan says that emerging markets are still considered by international investors as “the place to be”.
Editor’s thoughts: Any hope that South Africa could close the gap between its GDP growth rate and those of other so-called BRICS economies is rapidly diminishing. Are you concerned that recent political and socioeconomic developments will impact financial services consumers and thereby your business? Please add your comment below, or send it to gareth@fanews.co.za
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