Economy

SA recession unlikely: Old Mutual

24 April 2008

Despite gloomy forecasts for inflation and economic growth over the next 12 to 24 months, Old Mutual believes South Africa is unlikely to experience a recession, due to strong public and private sector investment, as well as fast-growing consumption spending by the country's public sector.

"A full-blown recession looks unlikely given the likely trends in investment and consumption by the private sector, as well as welcome support to key sectors of the economy from the weaker rand," said Old Mutual Investment Group South Africa chief economist Rian le Roux in a company statement this week.

"Investment growth rates would have to almost halve from their level of the past four years (11.6%), and household spending would have to turn negative (from 7% growth over the past four years) to cause gross domestic product (GDP) growth to fall below zero."

Le Roux pointed out that historically negative household spending has been rare, so even though consumption growth was expected to slow sharply, an outright contraction was not expected.

However, any unexpectedly severe inflation and interest rate shock in the months to come could still produce such an unwelcome outcome.

"Inflation and interest-rate-sensitive areas and other businesses that are unable to pass on rising costs to their customers are obvious victims of the current inflationary environment," he said, acknowledging that some sectors of the economy were certainly suffering and could even worsen before improving.

"However, it's worthwhile remembering that some sectors are still faring well. Local businesses competing with imports, exporters, tourism and the mining sector should benefit from the weaker rand, while high global commodity prices will further benefit mines and agriculture."

Current account deficit

In the meantime, Le Roux said the large current account deficit continued to worry investors and policy makers, as capital inflows could quickly dry up due to the current unsettled global environment, sending the rand weaker again.

However, while the current account deficit was likely to remain large, it was expected to narrow moderately during the course of the year on the back of sharply higher commodity export prices, slowing demand growth and the weaker rand.

And although the local currency has lost far more ground than most other emerging market currencies, Le Roux believed the worst of the weakness could be over, provided global conditions do not take another turn for the worse.

"A moderate narrowing of the foreign trade deficit and relatively high interest rates should lend some support to the rand, although the currency remains vulnerable to unfavourable global developments," he said, adding he was expecting the rand to trade broadly sideways through to 2009.

Containing inflation

The main challenge to policy makers in the months to come remained inflation, he said, with global commodity prices, increased electricity tariffs likely to keep consumer inflation on an upward trend. A further risk to the inflation outlook was that wage settlements could accelerate sharply during the course of the year.

"Against this background it is very possible that the reserve bank will raise rates again sometime later this year, despite the slowdown in the local economy," he said. "While such an outcome is certainly not a certainty, consumers should factor such a possibility into their spending and savings decisions in the months to come."

Le Roux's latest forecast was for consumer inflation to remain out of the South African Reserve Bank’s target 3 to 6% range through late 2009, depending on the key inflation drivers of food and energy prices and electricity tariff hikes later in the year.

SAinfo reporter