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Poor growth outlook will scupper job creation plans

01 February 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Old Mutual Investment Group SA (OMIGSA) is the latest in a line of fund managers to issue a subdued growth outlook for South Africa. At the group’s quarterly press conference, titled Volatility, key drivers and likely outcomes, senior economist Johann Els

Gordhan blamed the subdued Euro-zone economies. In a transcript of an interview with CNN he observed: “Europe is a major trading partner for South Africa. For the last 12 to 15 months it has had a major impact on our manufacturing industry and other export sectors as well.” OMIGSA is concerned about the impact of ongoing credit woes in Europe too. The group’s ‘base case’ for global economic performance through 2012 is labelled Gradual Healing & Normalisation, to which they attach a 55% probability. Under this scenario the European Union and United States dodge a full-blown crisis by addressing their debt issues, while global growth accelerates moderately through the year.

A moderate growth scenario

Els said that the developed world would overcome its woes thanks to continued fiscal tightening and aggressive monetary accommodation. In English – global economic salvation lies in “lower for longer interest rates” and massive cuts in government expenditure. Under the Normalisation scenario investors will turn to risk assets such as equities over interest-bearing assets and cash. For this scenario to play out the developed world needs to avoid the dreaded double-dip recession. As we power through the first month of 2012 there are already signs that this scenario is too upbeat. Certain Euro-zone economies kicked off the New Year on the brink of technical recession.

Given the dark clouds on the global economic horizon we may as well rename the Gradual Healing & Normalisation scenario an economic fairytale. The threat of double-dip recession aside, Els identified three risks to this fairytale, including a hard landing in China, the need for military intervention in Iran, and a failure to suitably address Euro-zone debt woes. Of the three the Euro-zone concerns seem the most threatening.

OMIGSA offered up two alternative global economic scenarios. On the plus side they assign a 20% probability to a fairly strong cyclical rebound. The probability of this scenario occurring must be fast approaching zero following the latest UK GDP statistic that shows a 0.2% contraction in Q4 2011. A second contraction in Q1 2012 would confirm a technical recession! A growth slump, to which OMIGSA assigns a 25% probability, is more likely. Under this scenario global growth screeches to a halt and we enter an outright double-dip (second round of recession). Should this happen we will see commodities and emerging market currencies tumble with deflationary concerns taking centre stage in the developed world. Governments will have to inject more liquidity into troubled regions via additional rounds of quantitative easing… And we’ll effectively be back where we started a couple of years ago.

Two sides to the Euro-zone dilemma

OMIGSA seems confident we’ll side-step the “double-dip” economic landmine. “We don’t expect a deep recession in the Euro-zone,” said Els. Even so, the region is precariously balanced between renewed recession and sluggish growth. This region’s debt poses a huge threat to the global financial system and economy. Setting aside the possibility of an outright collapse in Greece it emerges Spain and Italy will have to raise €290 billion over the next six months… As the entire region flirts with technical recession policymakers remain indecisive – unable to provide a workable solution to the crisis. To make matters worse governments are missing their ‘rescue’ targets by some margin. Spain, for example, undertook to reduce its deficit to 6%, but achieved worse than 8%.

How, we wondered, could OMIGSA trumpet a Gradual Healing & Normalisation baseline against this gloomy backdrop? Els quickly rattled off the Euro-zone positives. He said most economists were overly pessimistic on the region. For one thing the European Central Bank (ECB) is showing unprecedented support to financial institutions. It has already extended €489 billion to 523 banks at very favourable rates… The central bank also cut rates twice last year and is likely to drop the repo rate to 0.5% soon. A weaker Euro should also provide region-wide stimulus through 2012.

Where to for South Africa Inc?

What does this mean for South Africa? OMIGSA labels the most likely domestic economic scenario Moderate Growth, with a 60% probability. Els admitted that global growth concerns would impact the local economy. As already mentioned the group cut its 2012 GDP forecast to just 2.7%. They expect a moderate improvement to 3.5% in 2013. One of the drags on economic growth is household consumption expenditure, which is forecast to come in softer than expected at 3.4% for 2012 versus 5% last year. This decline is due to slower real disposable income growth, tighter lending standards, high household debt burdens and spiralling administered prices.

Inflation will peak early in 2012 just short of the 7% mark, after which OMIGSA expects it to trend lower through the year, ending at just 5%. These improvements are due to negative inflation in many categories of consumer goods and a slowdown in food prices. The trade-weighted rand will wash sideways for most of the year. “We expect the rand to move broadly sideways, with the ‘risk on’ trade pushing it stronger if the Euro-zone improves,” said Els. The rand could close 2012 at R7.90/$. Given growth and inflation forecasts OMIGSA expects the Reserve Bank to hold rates at current levels through the entire year.

At sub-3% growth government’s job creation plans will come to nought. “We don’t expect much employment in this moderate growth environment,” said Els. And there won’t be much wriggle room when Gordhan announces the budget on 22 February. Recent ratings agency downgrades require tight fiscal discipline. Whether this comes in the form of cropping the burgeoning public sector wage bill, cutting other expenditures, or hiking taxes, remains to be seen.

Editor’s thoughts: As we put the finishing touches to this newsletter the JSE All Share index powered to yet another record high. It seems local investors are quite happy to ‘bet’ on the base case presented by Old Mutual Investment Group SA. Do you think this investor euphoria will be short-lived? Please add your comment below, or send it to


Added by dr.zeek, 01 Feb 2012
Please note that there weren't any, "Recent ratings agency downgrades" for SA Inc. The OUTLOOK was downgraded but not the actual rating. There will be bitter pills to swallow in the 2012 Budget Speech, which, along with further administered prices hikes, will make it very tough going in 2012 for businesses and individuals.
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Added by Nickname, 01 Feb 2012
The global investment community seems to feed on a diet of recurring crises. In general, these may be of little concern to long-term investors, but they can be useful if you want to do some portfolio housekeeping. The atmosphere of profit and greed leads to the error of optimism. But when a crisis of confidence occurs, the investor is gripped by fear - the error of pessimism if you like.
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Added by Irene, 01 Feb 2012
The JSE is suffering from the same volatility and uncertainty as all the other markets globally. The number of trades indicate there is no investor euphoria to be found anywhere, with institutional and fund managers making the majority of trades with money entrusted to them and only the odd suckers still looking at equities. Gordhan and the Government must stop looking for excuses and blaming the global economic & financial situation and the business community for our woes. Even in the boom years, SA could not create enough jobs for its citizens because of an ill-qualified & untrained workforce resulting from an inefficient education system, unfriendly labour legislation favouring political partners and too much money taken from citizens via direct and indirect taxes both from national and local government, where inordinate service charges (e.g. on vehicle licences, water, electricity and refuse removal) even exceed the cost of the service provided itself in some instances. It is high time that the theft from public coffers, ballooning public servant numbers & salaries and spending on social grants is addressed to what the country can afford and not what the politicians wish to pay to remain in office. One can only hope that Gordhan will clearly spell out and cater for SA's SUSTAINABILITY in all future speeches and budgets. If not, the S in BRICS will quickly disappear, business move to greener pastures to the north and SA will become insignificant in the global and African context.
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