Sunday, 24 April 2011

SA recovery still on track despite Global Shocks

South African consumers can find some reassurance in the fact that, despite the serious shocks seen around the globe in the first quarter of the year, the economic recovery underway in South Africa is still on track and growth prospects remain positive.

We have experienced some unexpectedly serious shocks in recent months, such as the tragic earthquake and tsunami in Japan and political strife in the Middle East and North Africa, exacerbated by rising oil and food prices, further debt bailouts in Europe and concerns over tightening fiscal and monetary policies in many countries. All of these have negative consequences for economic growth, and have combined to spark uncertainty around the consequences for the global economic recovery, and in turn on South Africa’s own recovery. on the positive side, we believe that none of these threats has so far been substantial enough to derail South Africa’s growth path this year. In fact, we have kept our GDP growth forecast for 2011 unchanged at 3.7%.

Although we have not yet seen all of the negative fallout from the economic and nuclear disaster in Japan, that country contributes only 9% of global GDP, 4.5% of world imports and 5% of world exports, making it too small to cause more than a temporary “blip” in the global economic upturn.

Although it is the world’s third largest economy, we don’t see Japan as a ‘game-changer’ for the global economy,” he observes. “Its impact is likely to be relatively limited, and in a few months’ time we should start to see a positive growth momentum generated by rebuilding there.

Meanwhile, the political strife in the Middle East and North Africa (MENA) has important implications for emerging market governments everywhere.

The countries so far hit by the unrest – like Tunisia, Egypt, Libya, Bahrain and Syria, among others – are too small to slow down the global economic rebound. However, should the turmoil spread further in the Middle East and disrupt oil supplies, serious consequences could be felt. For now, we know that poverty and inequality is rife in many emerging markets. Other emerging market governments (especially autocracies and poorly performing democracies) could learn some valuable economic policy lessons from the uprisings to date. These include:

  • - Making growth, employment, poverty reduction and wealth redistribution even higher priorities;
  • - Placing special emphasis on price stability and improving efficiency in government delivery;
  • - Boosting food production to improve self-sufficiency; and
  • - From a global perspective, ensuring fast growth is not limited to China and India.

Turning to China, the Chinese government is “very much aware” of the impact the MENA uprisings could have on its own people. So even though the rest of the world is concerned about tighter monetary policy choking off growth there, it is unlikely that the Chinese economy will experience a sharp growth slump. The policy balancing act between containing inflation and stimulating growth is a delicate one that so far the Chinese government has proved to be very good at, and this is likely to continue for the foreseeable future. We don’t see Chinese growth falling off a cliff, despite their ongoing policy tightening, although it is gradually slowing from very high levels.

Some of China’s economic slowdown is being offset by the US, where the strength of the recovery continues to surprise to the upside. For example, the March Purchasing Managers’ Index (PMI) and Leading Indicator show the manufacturing sector and wider economy continue to rebound.

All this is good news for South Africa’s growth prospects, as the global economic recovery underpins our own. The rand has stayed surprisingly strong, helping to cushion the inflationary impact of higher oil and food prices. this is due to a number of factors: still structurally strong growth in emerging markets; high commodity prices; a healthy current account balance; our relatively high interest rates; and a strong fiscal position.

I don’t expect any of these factors to change significantly any time soon, which is why the rand is likely to stay relatively strong on a trade-weighted basis in the short term. Our budget deficit for the current fiscal year is likely to come in better than expected, our interest rates remain relatively high (they may start rising from late this year or early next year), the current account could deteriorate somewhat as imports rise into the recovery, but commodity prices should stay well supported over the longer-term.

The main concern remains our lack of progress in raising our growth levels structurally, from the current 3-4% to 6-7%, closer to the other BRICS members. We are expecting 3.7% GDP growth for 2011 and 4.0% for 2012. There are several measures we believe government must focus on to improve our growth prospects: lift SA’s relative competitiveness by encouraging a more competitive and productive labour force; increase infrastructure investment; improve service delivery (especially education); preserve a business-friendly environment to encourage private sector investment and continue to focus on keeping inflation low.

*Johann Els is a senior economist at Old Mutual Investment Group SA (OMIGSA).

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