The party is not about to end

The local economy is set to continue on is growth path, almost emulating the country in the 1960s, with structurally low inflation and higher economic growth, reports one senior economist.

Rian le Roux, chief economist at Old Mutual Asset Managers in SA, looking into his crystal ball for 2006 says that presently the global recovery is on tack, while the central bank is firmly focused on any inflation risks, global imbalances have not yet reversed and finally the overall environment remains South Africa friendly.

To provide a clue to 2006 le Roux says that in terms of rate cuts in the past four months, 20 of the 25 hikes occurred over the past eight weeks or so, while six of the eight cuts occurred in the past eight weeks.

Essentially the list is growing for those countries that are hiking rates. Will SA escape this trend. That is the big question on the Finance ministers’ mind.

He expects global growth to remain firm, although a little slower, with commodities providing the support, inflation expected to peak early in 2006, with the key global risks being the oil price resuming its uptrend, core inflation will rise, followed by central bank tightening.

The key risk is oil going back over $70 or higher.

So what about SA?

Currently the rand still firm on a trade weighted basis, inflation may rise, but its more muted than expected, growth will be solid, with 4%+ on course for this year (05) and 06.

Le Roux says that the interest rate outlook is benign, with the biggest downfall being a widening foreign trade shortfall.

There is no reason for the SARB to hike rates, says le Roux. South Africa is a different place and the rand is a different animal.

He says that the rand sustained strength is due to a number of factors: there is a supportive global environment, an improving local economic outlook, capital inflows are strong and SARB’s net reserves have gone from -$20bn to +$20bn.

The house view is that growth will surprise on the upside (4% to 5%), in spite of some concerns that the country was stuck in a 3% trap – with the outcome being either a political or policy-unstable country. That said there are several reasons for a good growth rate, and being stuck in the 4%-5% trap:

There is a big infrastructure drive on the horizon, the painful global re-integration has been completed, there is greater stability in terms of inflation and interest rates, confidence levels in the country are at an all-time high, and there is a growth in fdi and this is set to continue, and finally consumer finances remain very healthy.

Households are not going to role over and play dead (debt), they are happy to continue spending.

He does caution that there are some obstacles to that 6% nirvana growth rate. The question around whether government can deliver on the infrastructure drive, the issues around skills shortages and the inflexible labour market, the low savings ratio, and the fact that the rand is not competitive enough at current levels.

Le Roux says that there is a risk that the SARB could turn more hawkish. There are several reasons for this: it appears that inflation can rise cyclically, with strong demand growth holds second-round risks in terms of fuel prices. SARB will be pre-emptive and not reactive as they were in 2002.

They do want to contain inflation expectations and there is the global risk of rising rates, with the finance ministers’ support for a pre-emptive approach confirms the government’s anti-inflation commitment.

If they get pre-emptive then the statistics show that the rate increases are less severe than a more reactive approach.

While le Roux says that the risk of a rate hike has increased, there is no clear sign that the rates will rise in the near future. On the question on signs, Treasury has been critisised for not providing more clear signals of their intentions.

As a counter argument le Roux says that moderate hikes early in the cycle may do more good in controlling inflation, rather than damage the performance of the real economy.

fdi and the current account deficit

The current account deficit in the 1950/1960s was of the order of 20% of GDP. We are looking at a 7% ratio currently and le Roux maintains that people should focus too much attention on this ratio.

Le Roux has maintained that local fdi takes a different form in SA. We have a rather well-developed local economy and earnings from fdi shouldn’t be over-emphasized.