The Star Late Edition
Global slowdown key to SA economic outlook
THE SEVERITY of the global economic slowdown holds the key to the South African economic outlook in 2012.
Not only will this to a large extent determine the extent of growth slowdown in the country, but it will also arguably be the key driver of the rand’s trajectory, which is in turn a critical determinant of the interest rate and inflation trajectories.
We are more bearish than the consensus about the prospects for the South African economy in 2012, expecting at best 2.8 percent growth.
The likely underperformance of the economy relative to the government’s optimistic 3.4 percent forecast is one of the reasons for our concern about a further deterioration in the fiscal metrics, where we expect the 2012 budget deficit to be about R20 billion (or 0.4 percent of gross domestic product) larger than the government’s latest prediction.
In addition to the anticipated revenue underperformance, we expect growth in the government wage bill to be higher than forecast and put pressure on the budget deficit.
We forecast a rapid rise in consumer inflation from 6 percent in October 2011 to nearly 7 percent early this year. In the near term, we expect intense upward pressure on inflation from food prices, followed by the delayed pass-through from the rand’s depreciation in the latter part of last year.
We expect inflation to exceed the Reserve Bank’s 3 percent to 6 percent target range for most of this year, but it should re-enter the target range from the end of 2012 on a sustained basis. Our forecast that the rand will recoup some of its losses in the second half is a very important assumption underpinning the retreat of the inflation trajectory in the medium term. This is preventing the central bank from easing monetary policy further despite its concerns about downside risks to global (and in turn local) growth.
Consumers have strongly exceeded expectations in the post-recession recovery, supported by multiple tailwinds including the lowest interest rates in more than three decades, a very expansionary financial stance, modest inflation, higher-than-expected wage increases and a recovery in confidence.
However, the boost from these tailwinds is fading. The explosion of the government wage bill, which grew by nearly 25 percent in 2010/11, was directly responsible for nearly half the growth in households’ disposable income. This cannot continue and even if the government modestly exceeds the projected 6.5 percent annual increases in the wage bill this year, it would be a very abrupt deceleration in this regard.
Sharp hikes in the costs of non-discretionary spending items such as food and energy will further erode consumers’ real spending power.
Political and policy debates will shift to the forefront in 2012 with the ANC’S policy conference in mid-2012 and its leadership election at the end of the year. While there will be intense debate and frequent media coverage of policy issues such as nationalisation, we do not expect any big economic policy changes.