Good news - no SA recession

Johannesburg - With economic opinion increasingly gloomy over the inflation and growth prospects over the next 12 to 24 months, there is some positive news on the horizon: the country is unlikely to experience a recession, bolstered by still-strong investment spending by the government and the private sector, as well as fast-growing consumption spending by the public sector.

This is the view of Rian le Roux, chief economist at Old Mutual Investment Group SA (Omigsa).

"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," he says. "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 GDP growth to fall below zero.

"Also, historically, negative household spending has proved to be relatively rare. So while consumption growth is expected to slow sharply, an outright contraction is not expected."

Some local benefit

Some sectors of the economy are certainly suffering and could even worsen further before improving, he acknowledges. "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.

"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."

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

However, while the current account deficit is likely to remain large, it is 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 already been targeted for a sell-down by offshore investors earlier this year because of rising risk aversion and the current account deficit - losing far more ground than most other emerging market currencies - Le Roux believes the worst of this weakness may be over, provided global conditions do not take another turn for the worse. He is expecting the rand to trend broadly sideways from here through 2009.

The main challenge to policy makers in the months to come remains inflation. Global commodity prices are still putting upward pressure on local inflation and with electricity tariffs set to rise sharply, CPIX will trend still higher in the months to come.

- I-Net Bridge