Johannesburg - The South African Reserve Bank's latest quarterly bulletin indicates that the country's economic outlook is deteriorating rapidly, economists believe.
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.
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."
Shrinking investment
"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 7% in 2009."
Absa Capital shares the view that the economic outlook for the country is deteriorating rapidly.
"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% q/q rate in Q3 08 after growing 0.9% 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% of GDP in Q3 08 from 7.3% 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 3% in 2008 to about 1% in 2009, and look for the economy to contract over the next few quarters.
Cautious approach
"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.
"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 November 28 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."
Rand volatility
"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.
"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.
- I-Net Bridge