Standard Bank economist Danelee van Dyk says the national accounts show
that the economy is entering a phase of low growth which will probably
last for two or three quarters.
"The demand side of the economy is very vulnerable with the exception
of fixed capital formation by public corporations which will drive the
economy over the medium-term. Given the global and local uncertainty,
risk aversion and weak commodity prices, private sector investment will
come under increasing strain going forward. It is anticipated that
households will remain cautious as a result of the generally negative
sentiment currently prevailing," she says.
Cautious policies
Van Dyk adds: "The economy has been underpinned by relatively strong
fundamentals, which is crucial in mitigating the adverse external
shocks (such as those brought on by the global financial crisis).
Cautious policies, both fiscal and monetary, have time and again served
the economy well, which is capable of sustaining the deficit on the
current account. In turn, the current account deficit is expected to
narrow substantially in the year ahead as the invisibles component,
i.e. the net service, income and current transfer payments, moderate on
the back of a slowdown in corporate earnings and profitability, and
generally lower levels of trade.
"Notwithstanding the mitigating effects of lower net service, income
and current transfer payments, the rand’s weakness is expected to
prevent larger gains from importers of dearer consumer goods in the
months ahead, but on a net basis keep imports inflated. We anticipated
a continued stream of trade deficits in the coming months owing to a
deterioration in the terms of trade and weak global growth. The deficit
on the current account is expected to narrow to below seven percent in
2009."
Absa Capital shares the view that the economic outlook for the country is deteriorating rapidly.
Bleak picture
"Yesterday’s demand-side data released by the SARB confirm the bleak
picture painted by earlier high-frequency indicators, such as new
vehicle and retail trade sales, and consumer and business confidence,"
it says.
"Household spending contracted at an annualised 0.8 percent
quarter-on-quarter rate in Q3 08 after growing 0.9 percent in Q2, with
spending on durable goods being particularly hard hit. Q4 08 consumer
confidence, released by the BER, points to a further deterioration in
household spending growth, with consumer sentiment falling to -4 from
-1 in Q3. This decline was underpinned by the deterioration in
high-income earners’ expectations, while the majority of consumers
continue to view it as an inappropriate time to buy durable goods.
"Private sector investment spending also appears to be flagging as the
slowdown in domestic economic growth and global recessionary conditions
are leading to a re-evaluation of private sector investment
programmes," Absa Capital says.
It adds: "We think that private sector investment may actually shrink
next year, with public sector investment growth being supported by the
infrastructure spending programme. The current account deficit widened
to 7.9 percent of GDP in Q3 08 from 7.3 percent in Q2 as a moderation
in import growth and lower oil prices were unable to offset the effects
of a marked fall in key export prices and slower global growth.
Overall, we expect economic growth to slow from just above three
percent in 2008 to about one percent in 2009, and look for the economy
to contract over the next few quarters.
Depreciation risk
"In our view, faltering economic growth and prospects of sharply
falling inflation in 2009 will provide the SARB with sufficient
ammunition to cut rates by 50bp at the 11 December MPC meeting – this
despite the widening of the current account deficit and the
depreciation risk it poses in a world of troublesome capital flows."
Nedbank’s economic unit concurs that the latest Quarterly Bulletin confirms the slowdown in the domestic economy.
"The household sector remains weak and vulnerable, while divergent
trends in capital spending continue. The balance of payments figures
highlight the necessity of attracting foreign capital, a challenge that
needs be taken into account in setting macroeconomic policy," it says.
The Reserve Bank’s MPC will be conscious of both the slowdown as well
as balance of payments pressures when it meets today and tomorrow, it
adds.
"Global economic conditions have deteriorated significantly and the
local economy is starting to falter. The focus globally is turning more
towards the sudden slowdown in real economic activity. Monetary policy
is being eased across the globe, with major central banks reducing
their policy rates to multi-year lows. Last week alone the Reserve Bank
of Australia reduced its key rate by another 100-basis-points (bps),
the Bank of England by a large 100 bps, the European Central Bank by 75
bps and the Swedish Riksbank by 175 bps.
Annus Horribilis
"Domestic inflation news has improved despite rand weakness and the
case for an early cut in interest rates is now very strong. There have
even been official hints that an easing is not far off (for example, in
Governor Mboweni’s 28 November Annus Horribilis speech). The December
MPC meeting could well yield the necessary change in policy, although
there is still a chance that the committee may be cautious and delay
cuts to early 2009.
"This could now only be because of balance of payments concerns. In our
view, however, a delay in easing at this meeting could cause more
funding difficulties later once markets start to focus on relative
growth prospects. In any event, the first cut is now unlikely to be
later than February given the overwhelming evidence of local and global
economic weakness, the deflationary forces at work and the dangers of
waiting too long," Nedbank says.
Kevin Lings, economist at Stanlib, believes that looking forward, the
current account is likely to improve, albeit modestly, in the quarters
ahead. This is on the back of a slowdown in the domestic economy; and
hence some moderation in import demand, as well as a reduction in
dividend outflows, due to softer corporate earnings, he says.
Extensive and unprecedented
"However, looking further out (2010 and beyond), there is little doubt
that South Africa’s import demand will rise noticeably as the country
embarks on an extensive, and possibly unprecedented, infrastructural
development programme," he adds.
"Consequently, the trade account is set to remain in deficit for the
foreseeable future. Hopefully, the development of SA’s infrastructure,
especially the port and rail infrastructure, will lead to some increase
in exports in the years to come."
Irrespective of the potential increase in exports, he says, South Africa is set to run a current account deficit for many years.
"Ironically, this is actually crucial for the development of the
country given that most of the key capital equipment needed to enhance
the productive capacity of the country will have to be imported. We
will therefore continue to focus on the funding of the current account
deficit for years to come, and the rand will remain at risk in terms of
both direction and volatility," Lings argues.