Econ­omy isn’t all doom and gloom

Weekend Argus (Saturday Edition) - - FRONT PAGE - MARTIN HESSE

As an in­vestor, or a po­ten­tial one, you may be dis­heart­ened by the many gloomy mes­sages in the me­dia about the fi­nan­cial mar­kets. Although in­dus­try ex­perts have dif­fer­ent views, some say the in­vest­ment en­vi­ron­ment is not as bad as it is painted.

Old Mu­tual In­vest­ment Group ( OMIG) econ­o­mist Jo­hann Els, at an Old Mu­tual con­fer­ence for in­vest­ment man­agers in Cape Town last week, said the South African econ­omy is not as dis­mal as it seems, and we must not al­low the po­lit­i­cal tur­moil and credit ratings down­grades to blind us to the pos­i­tive as­pects, which in­clude bet­ter global growth hav­ing a knock-on ef­fect on South African growth, an im­prove­ment in South Africa’s cur­rent ac­count bal­ance, the pos­si­bil­ity of a lower bud­get deficit, lower in­fla­tion, and a turn in the in­ter­est rate cy­cle.

And although our cur­rency, the rand, re­mains vul­ner­a­ble to po­lit­i­cal events, it is much firmer than it was at the end of 2015, mainly be­cause of bet­ter prospects for emerg­ing­mar­ket economies.

On the in­ter­na­tional front, Els noted the fol­low­ing pos­i­tives:

• An up­turn in global gross do­mes­tic prod­uct (GDP) growth;

• Com­mod­ity prices. Although they have come off the highs they achieved in the sec­ond half of 2016, com­modi­ties, such as gold, plat­inum, coal and iron ore, are still strong com­pared with their lows at the end of 2015;

• Global pur­chas­ing man­agers’ in­dices, which re­flect con­di­tions in the man­u­fac­tur­ing and ser­vice sec­tors, are pos­i­tive;

• Eco­nomic growth in the United States is pos­i­tive, de­spite a slow­down in the first quar­ter of this year, and fears of de­fla­tion are sub­sid­ing;

• A stronger-than-ex­pected Europe, re­sult­ing in a slightly weaker US dol­lar, which is good for com­mod­ity prices and emerg­ing mar­kets; and

• Although GDP growth is slow­ing in China, a slump is not ex­pected, and the coun­try’s fi­nances are more sta­ble.

Els said there was room to be op­ti­mistic about the South African econ­omy, par­tic­u­larly in the short term, be­cause:

• The uptick in the global econ­omy is hav­ing a pos­i­tive ef­fect on ours.

• Ex­ports are pick­ing up, while im­ports are slow­ing.

• There have been higher crop yields, fol­low­ing bet­ter rain­fall in the ma­jor crop-grow­ing ar­eas.

“Even if the non-agri­cul­tural econ­omy does not grow, the agri­cul­tural re­cov­ery could lead to 0.5% to­tal GDP growth this year,” Els says. Some growth out­side of agri­cul­ture is also ex­pected; thus OMIG ex­pects GDP growth at about 1.2% in 2017.

• Con­sumers, while still un­der pres­sure, are slowly un­bur­den­ing them­selves of their debt. House­hold debt as a per­cent­age of house­hold in­come has fallen, from about 85.7% at the end of 2008 to 74.4% at the end of 2016.

• In­fla­tion is com­ing down – it fell to 5.3% in April – and, for at least the next year, is ex­pected to re­main within the range of 3% to 6% tar­geted by the South African Re­serve Bank.

• Lower in­fla­tion marks a turn in the in­ter­est rate cy­cle. OMIG ex­pects one 25-ba­sis-point cut this year and pos­si­bly two cuts next year..

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