Wednesday, 8 July 2009

Into the Light - The State of the South African Economy

After months of denials, clever word play & sidestepping the question, Trevor Manual & Tito Mboweni have finally relented that South Africa is in a recession. So what exactly does this mean? In short, it means that we experienced negative growth for the first time in 17 years.

So why the sudden change in mood? Whatever happened to ‘We will weather the storm’ or ‘South Africa will be resilient against the credit crisis’ or ‘Our banks are world class & didn’t buy any toxic assets’. When Europe & the US are our biggest trading partners, isn’t it ignorant (or stupid if you like) to think that we won’t be affected by the fall out? (The fact that the SA economy is approximately 6-8 months behind UK is no excuse for the turnaround from our esteemed financial leaders)

The Economy – Who is steering the ship when there’s no rudder?

According the Cees Bruggemans, chief economist for FNB, the economy grew by 3% in 2008 and contracted by 1-2% in 2009. This was mainly due to the global banking and credit crisis and its impacts on SA’s mining and industrial exports. But a rebound of 2-4% should be seen by 2010.

Our inflation outlook remains positive with signs of further decline from a height of nearly 14% in 2008 to 8.5% in 2009. The expected average in 2009 is 7.5%% whilst 2010 will see it fall into the SARB’s target range of 5%. But a lot of assumptions are taken into consideration for this outlook !! Assumptions such as a global deflation during 2009, coupled with mild inflation in 2010 as well as the ‘small chance’ of oil price fluctuations. (In Summary: Let’s get out the dartboard & have a fat stab at what things might be like)

The Property Market – All pain, No gain?

The inescapable truth is that the worst and most widespread economic recession since the 1930s continues to batter the housing market not only in the UK and SA, but in markets across the globe.

According to Knight Frank, a major player in the international property market, there are a combination of factors that have contributed to the current decline in house prices. These include affordability, an increase in unemployment which in turn affects consumer confidence. With the recent 3.5% reduction in interest rates since December 08, South African banks have still decided to tighten their lending criteria ,as their outlook has changed from a national level to one of global sentiment. (So they’re actually comparing apples with pears……I hope Tito gives them all a fat klap !!)

Even with the current market perfectly suited to bargain buyers flushed with cash, the sales remain inconsistent proving that even these buyers are playing a waiting game for a clearer sign that the market has reached ground zero. The biggest problem that still remains is that houses are still highly unaffordable due to previously rapid property growth, low interest rates & high disposable incomes. In light of all that, maybe it’s not a bad thing that the tables now have turned from the heady days of rapid property growth. Otherwise, things could’ve been a lot worse than they are now.

The Upturn – What is that?

But is the doom and gloom we’re currently experiencing the start of things to come, or will an improvement be seen any time soon? (I’m hesitant to use the word recovery)

For the UK, the recession has slowed & according to Alistair Darling, Britain’s Chancellor, an improvement is expected by late 2009. He goes on to say that a 1.5% growth is expected provided that banks ease lending criteria to consumers as well as companies. (Those silly banks again !)

If you take the 6-8 months that SA lags behind, we could see an improvement by the World Cup in 2010. Coupled with the continued investment in our country’s infrastructure & the international exposure gained from hosting the biggest event on the planet (Don’t forget the projected R21 billion cash injection that will be generated by the event) I therefore think it safe to say that the economy will be due to jumpstart back into action, by middle to end 2010.

As for now, remember that any recession is part of a cycle. Even when things seem to be at its darkest possible point, the cycle will turn & take us back into the light.

Do not go gentle into that good night. Rage, rage against the dying of the light – Dylan Thomas

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