After all the doom and gloom predictions that we have become used to about the end of the world as we know it, W-shaped recoveries and the risk of a “double dip”, Old Mutual economist Johann Els made a very valid point this week. The global recovery has been ahead of all expectations.
Right now we are experiencing a V-shaped recovery — something no-one was predicting a year ago. During the peak of the crisis when fear reigned supreme, analysts believed the growth engine had been too severely destroyed to make a rapid recovery.
The market recovery in particular has been spectacular with the S&P 500 (US market) up 80% since March last year. The question now is whether the market was previously irrationally pessimistic or whether it is now currently irrationally optimistic.
Els’s view is that the global recover will continue, albeit at a moderate pace. He uses some strong arguments to make his point. Apart from the emerging economies which are driven by the China story, Japan has surprised on the upside showing a 2,3% economic growth and rising employment rates — something no economist had predicted. Leading economic indicators in US, Japan, Germany and China have all moved sharply upwards, showing that the recovery has been widespread.
Profits returning
US exports to China have recovered and now exceed the peak of the early 2008, US retail sales although not booming, show that the consumer is not completely dead and US profit margins are returning. Els dismisses fears of interest rate hikes in the US as US inflation is still very much under control.
Locally Els is far more optimistic than the IMF which is predicting a 2,6% growth rate for South Africa this year. Els argues that SA could see the growth rate for 2010 as high as 3,5%, something echoed by FNB CEO Michael Jordaan who believe we could see growth above three percent. Els points to improved car sales, increasing number of home loans as well as the recovery in consumer confidence.
Els is predicting a growth rate of four percent next year. He also believes that interest rates at worst will remain flat for the rest of this year with a slight chance that we could see a further 0,5% rate cut if the rand remains strong. This would not be done to weaken the rand (foreign inflows onto the JSE have more impact that interest rates) but a strong rand does temper imported inflation giving the SARB room to move.
Time will tell whether Els’s more optimistic view is the right one, but it certainly makes for refreshing news.
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