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PMR's Editorial philosophy:
"It is only by standing on the shoulders of
giants that I have been able to see further."
Sir Isaac Newton,
1642–1727
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SA Scenario
Changing outlook for 2008
Cees Bruggemans, Chief Economist, FNB
So oil is safe, for now, although tight demand-supply conditions globally and strong financial inflows into the sector support a high oil price floor.
The bad news is that the credit-cum-banking implosion in the US will require more time mending. The best analysis of its current condition was provided by Fed chairman Ben Bernanke in a speech on 10 January (recommended reading on
www.federalreserve.gov).
Along with strong infrastructure-led investment in large parts of the world, and strongly performing commodity high-rollers, it suggests ongoing global growth, if modestly slower than in 2007. Meanwhile, the global savings surpluses remain large, concentrated in commodity producers and leading Asian emerging countries, whose sovereign wealth funds are dramatically extending their global equity reach.
South Africa, on balance, remains favoured by these global trends. Although our large current account deficit at 8% of GDP should penalise us, the global search for quality assets remains active, and we beneficiaries of carry-trade attractiveness and of the weaker Dollar pumping precious metal prices higher, gold reaching $900 territory, and more such juice still beckoning.
For as long as this logic keeps operating, South Africa will find itself supported, with the Rand currently in 7.00 -7.50:$ territory, even as the SARB steadily keeps accumulating forex, with the foreign reserves this year likely topping $40bn.
It seems far too soon for this global dynamic to change fundamentally, with the US workout probably taking care of 2008. It would, therefore, seem that only ‘own goals’ could jeopardise our 2008 prospects, for which reason politics will be important this year. Even so, it seems far too early for significant policy changes, which may only materialise by 2010, if they are going to happen.
Meanwhile, the exceptionally high consumer spending dynamic of 2003-2007 is finally being garroted by the higher interest rates and new National Credit Act.
New passenger car sales in December were 19% down on a year ago, with 2007 down 10% on 2006. This suggests more of a downward adjustment in 2008 of the order of 5% – 7% before passenger cars hit bottom. Eventually, the replacement cycle needs to get rescued by an ageing car park, with ongoing income and employment gains and an end to interest rate increases improving affordability.
But over in the residential building industry, its plunge is only now coming into focus. This adjustment has been taking its time showing itself, probably due to the very gradual rise in interest rates, and the strong growth momentum in the economy.
Even so, residential building plans passed have been slowing for two years now, as measured in square metres, with this measure in late 2007 actually turning negative.
While residential buildings completed data remained strongly positive late into 2007, as much as +10%, importantly bolstered by affordable housing, the writing is on the wall – as much in the gradual slowing of the buildings completed data as plunging building plans passed data.
Residential building investment will likely turn negative in 2008, to the tune of 0% to -5%. Along with the weaker bias in the residential property market, this is likely to weigh yet more on sales of furniture, home appliances and textile furnishings, with all such items likely to take a further stepdown in sales volumes in 2008.
Thus, the durable and semi-durable consumer segments will likely bear the brunt of the cyclical adjustment underway. It suggests asset-backed (household) credit growth to keep on easing, from a peak of nearly 30% in late 2006 to 22% in late 2007, easing towards 12% – 15% in 2008.
Given the state of the balance of payments (puffed up by consumer import spillovers) and the overheated spending effects on domestic producers, the SARB was prepared to ensure deflation of such excessive household spending, now that fixed investment had sufficiently recovered to take over the growth leadership role.
Still missing in action is export out performance. Rome wasn’t built in a day, however, and the rising fixed investment ratio will ultimately contribute to a much needed export revival. Meanwhile, we remain dependent on, and supported by, commodity prices – in turn entirely determined by global tendencies. Manufacturing is unlikely to make much of a contribution, given strong low-cost global competition, and our firmly valued Rand.
With household consumption taking a backseat after four years of superior growth, and exports as yet not a major growth contributor, the leading role in our long-term expansion has now decisively been taken over by fixed investment spending.
Within this lead sector, infrastructure is the main agent, causing public corporations to lead by far in the growth stakes, and likely to do so for many years.
Mining investment is strong, non-residential building activity is still gearing up (office space), and transport and communication is also still strong.
The spending outlook will probably get further bolstered by inventories. Commercial inventories may still encounter a degree of involuntary accumulation as sales growth disappoints, where agriculture should assist with good crops this year.
This brings into focus the producer side of the economy, where the primary sectors should be major growth leaders, its output contribution registered mainly under exports (mining) and inventories (agriculture).
Also, going by 2007, and the current political turmoil, the public sector may continue to expand its staffing quite vigorously, thereby contributing to GDP growth.
So, whereas a part of the spending spectrum is suffering slowdown (credit-based consumption), other parts remain strongly vibrant (fixed investment). With GDP growth remaining close to 5% in 2008, after comfortably topping it in 2007, employment and income gains should also remain positive.
In turn, this promises ongoing consumer confidence, for many reinforced by the political environment, and support for especially the more basic type of consumer purchases, mostly not import dependent.
Though consumer imports should fall off, the current account deficit is unlikely to shrink, given the stiff increases in fixed investment with a very high import component, and the only modest increase expected in national savings.
Such a large current account deficit, however, should be more easily financed, given the likely increase in export credits obtainable to finance our growing capital goods imports.
CPIX inflation is currently surging towards 9% on the back of higher oil and food prices, but in 2Q2008, we should be back below 7.5%, hopefully falling back within the SARB target zone of 3% – 6% before year-end, or otherwise in 2009, as the base effect of higher commodity prices eventually turns into our favour.
Website: www.fnb.co.za/economics
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