/ 30 March 2012

Caution tarnishes the silver lining

Global and local economies are looking better but it is not yet time to pop the champagne corks. Local business sentiment is ticking up, as is business confidence, and consumer spending continues to be the backbone of economic growth.

But the private sector is still holding back on investing and inflation could surge to 6.7% in coming months, according to Absa Capital, which released its quarterly perspectives this week.

Absa Capital economist Jeffrey Schultz said consumer spending remained the key impetus to growth, which was helped by 522 000 jobs being added to the economy since the third quarter of 2010. This, in turn, helped to sustain strong consumer spending.

Local business indicators were also looking up. Business confidence measured by the Bureau for Economic Research was back at 52, above 50 for the first time in a year. Demand-led sectors such as vehicle and retail showed the highest improvement in the first quarter of 2012 and struggling production-led sectors, such as construction and manufacturing, were gaining traction.

But despite this, Schultz said Absa had tweaked its 2012 gross domestic product (GDP) growth forecast lower, from 2.8% to 2.7%, over growing concerns about electricity constraints and the impact of industrial action in some sectors.

Surprisingly, investment had been positive in recent quarters, he said. Private-sector investment grew by 6% and GDP fixed investment experienced larger gains than before.

Noting the high levels of corporate savings in 2011, Schultz said: “But the private sector is still sitting on its hands in terms of significantly engaging in new amounts of investment.”

He warned that the Reserve Bank’s “accommodative language” could take a sharp turn in the “very near term” and there could be an interest rate hike as early as November. Earlier, the bank had predicted an interest rate hike only in March or May of next year.

Schultz said the normalisation of interest rates would begin soon and they would rise steadily. “We continue to pencil in the first 50 basis points rate hike for the last monetary policy committee meeting of this year and for a total hiking cycle of 200 basis points delivered gradually.”

Absa also expects consumer price index inflation, spurred on by rising food and fuel prices, as well as underlying inflationary pressures to go up, peaking at 6.7% by mid-year before edging back into the target range — between 3% and 6% — early next year.

Mike Keenan, an Absa Capital currency strategist, said the rand recovery witnessed since mid-December would continue.

“We expect the rand to reach the R7 handle in relation to the dollar by mid-year [and R9.10 versus the euro], followed by a modest weakness.”