Business

Economy to 'bounce back' in 2010

21 December 2009

South Africa's economy is set to bounce back strongly in headline-growth terms in 2010, says asset manager and investment bank Nomura.

This was due to continuing infrastructure spending, a contribution from net trade, and restocking from low levels, it said in a statement this week.

"On top of this, the World Cup will add 0.7 percentage points to growth from short term consumption and investments, on our estimates."

Nomura said that consumption, however, looked set to remain lacklustre (around 0.2 percent year-on-year from minus-3.3 percent this year and 2.4 percent in 2008) as households remained constrained by unemployment, debt and wealth effects. However, still-high real wage increases should provide a small buffer.

"We do not expect a full recovery on this front until 2011, when employment should start rising again."

Investment growth

Nomura said investment growth should slow to 2.7 percent, compared with 11.7 percent in 2008 and 3.9 percent in 2009, "because, although public-sector investment volume remains very high, little new money will be available to fund the same level of rapid growth".

Given long-run structural rigidities on the supply side, Nomura estimated potential growth in the economy in the medium term at around 3.5 percent.

It expected consumer price inflation to hover around the upper end of the target band (six percent) through 2010 as low demand pressures were offset by another large rise in electricity prices.

Nomura said it expected the National Electricity Regulator of SA to grant Eskom slightly less than its 35 percent tariff-hike application.

The compounding second-round effects of wage growth and energy price rises into 2011 also had to be taken into consideration.

Interest rates

"We expect interest rates to remain unchanged until the fourth quarter of 2010."

The South African Reserve Bank's monetary policy committee (MPC) saw inflation pressures remaining broadly under control until then, "but we believe it will be surprised by growth and inflation into end-2010 and revise its forecasts accordingly".

Nomura said its key call for 2010 was that, following a tripartite alliance report in February, the Bank's mandate should change to a dual mandate, with a clause on inflation-targeting and a clause on promoting growth and employment.

"Given that the MPC is already so flexible, looking strongly at growth, we do not expect this shift to affect the way the MPC decides interest rates."

As such, it looked like an easy political win for the African National Congress without fundamentally affecting policy credibility.

"That said, there may well be a strong market reaction in the short term and a strong communication strategy will be needed.

"We believe new Governor Gill Marcus will handle this with aplomb."

Policy

Nomura said since Jacob Zuma's election as President in April 2009, there had been little new policy and no shift to the left.

"That said, political debts will come due in 2010 and we see much of this year's political noise from the left continuing, with increasing in volume, into the New Year. However, we still see no fundamental shift in policy."

Nomura added that budget plans looked credible but were based on no significant new legislation.

"Given new housing, education and national insurance bills, as well as a sluggish recovery in revenues, we look for the fiscal deficit to remain very sticky in 2010," it said.

Sapa