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Economists forecast lower growth through 2012

17 January 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Those holding thumbs for a major economic recovery through 2012 should prepare for disappointment. At an Absa Capital presentation hosted in Johannesburg during December 2011 the group’s economists downgraded their South Africa GDP growth forecast for FY

Why are economists revising their GDP forecasts downwards? On her New Year visit to our shores International Monetary Fund (IMF) MD Christine Lagarde identified unemployment and the ongoing Euro-zone debt crisis as the biggest threats to South Africa’s economy. Absa Capital pre-empted her fears: “We are concerned by the significant slowdown we have observed in global Purchasing Managers Indices (PMIs) and trade of late, particularly with respect to Europe.” More recently, news agency REUTERS added their voice to the “doom and gloom” brigade. They said the latest Euro-zone PMIs pointed to a mild recession across the region, with South Africa’s exports under threat as a result.

Can the consumer save South Africa Inc?

The good news is that South Africa’s household consumption sector remains resilient. Absa Capital expects household consumption expenditure to come in at 3.8% in 2012 (down only slightly from their previous 4.1% forecast) thanks to improvements in households’ real disposable income. Higher employment (193 000 jobs were created in Q3 2011), a benign interest rate environment (there were no rate hikes last year) and manageable debt servicing costs should reflect positively on this segment of the economy this year. Consumer confidence – which has been in decline since mid-2010 – turned the corner in the final quarter last year. “Given our view that consumer confidence is key to discretionary spending in the economy, this resilience in confidence is critical for the consumer to remain the backbone of GPD Growth through 2012,” they say.

They caution, however, that “the ability and willingness of consumers to take on significant amounts of new debt remains constrained!” Local credit extension came in at a paltry R50.2 billion to October 2011, some R13 billion short of the comparable 2010 period.

Pinning our hopes on international trade

Flicking through the international business broadcasts feels a bit like being trapped in a poor remake of the movie Groundhog Day. Each New Year since 2009 has brought a similar package of global financial problems – all revolving around monetary system liquidity and sovereign debt. The Euro-zone debt issue looms as large this year as it did 12 months ago… And just when we thought it couldn’t get any worse Iran kicked off a round of sabre-rattling with the US! Absa Capital reminds us that the global economy is among the top downside risks South Africa will face through 2012.

Our developed world trading partners are struggling with GDP growth forecasts of 2% or less despite interest rates at multi-year lows. If demand from the US and Europe remains sluggish our manufacturing sector will experience another bad year. A third of our 2010 manufactured exports went to Europe, with Africa (27%), Asia (22%) and North America (13%) each accounting for a large slice. There is some respite from a better regional mix of mineral exports. Asia – which is not as troubled as the developed world – accounts for 58% of this trade… We should therefore enjoy some insulation from developed world woes thanks to the powerhouse emerging market economies China and India.

The war with inflation to continue

Inflation will most likely trend higher this year. Absa Capital expects a peak of 6.7% in CPI in Q2 2012 with an average 6.5% for the full year. Upward pressure on prices will come largely from food and fuel. “Food inflation has overshot both our and the market expectations in recent months,” they say. A maize deficit in the local market could push prices even higher as South Africa is forced to import to meet its food needs. But despite these pressures the Reserve Bank is expected to keep rates on hold for longer. A rate hike is still on the cards, but the  economists now believe it will be delayed until Q4 2012. “As long as GDP muddles around 3% we believe that rising inflation will matter more to the Reserve Bank,” opines Absa Capital.

The value of the rand against the currencies of our major trading partners will also impact on price levels this year. Absa Capital expects the rand to reverse its disappointing 2011 performance and have pencilled in a R7.70/$ level by year end. They forecast a weakest level of some R8.20/$ between April and June. The favourable fundamentals which continue to exist for the rand are likely to limit the extent of further deprecation. A REUTERS’ survey of 34 foreign exchange analysts and economists backs this view. The consensus forecast is for the rand to weaken to R8.33 by March and to climb back to R7.82 by year end.

Editor’s thoughts: Financial services performance hinges almost entirely on the financial health of local consumers. Although Absa Capital expects consumption demand to remain buoyant through 2012 there are some indications that consumers are still struggling with debt. Do you expect your clients to have more or less disposable income through 2012? Please add your comment below, or send it to gareth@fanews.co.za

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