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Send  Share  RSS  Twitter  15 Oct 2010

ECONOMY: Encouraging Domestic Signs Despite Global Uncertainy

 





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Domestic economic data released during September and October suggests that prospects for a slow recovery in the SA economy remain relatively sound, although the impact of global economic uncertainty provides grounds for ongoing caution.

Daryll Owen, Chief Investment Officer at BoE Private Clients, says that the non-binding proposal by US-based Walmart Stores for the purchase of Massmart during September, together with the earlier HSBC/Nedbank announcement, suggest that foreign companies perceive there to be growth prospects in the local economy.

“The Walmart announcement is a proposal, much like the HSBC/Nedbank announcement, and will only amount to an offer once a due diligence (amongst other factors) is completed. Nevertheless, the offer confirms that South Africa is definitely on the radar screens of foreign investors and companies looking for growth opportunities. SA offers this through a growing middle class, as well as a favourable location as a springboard into Africa,” he says.

Other positive economic signals over the previous two months include the Reserve Bank’s Monetary Policy Committee decision to cut the repo rate to 6% largely on the back of revised (lower) inflation forecasts, the better-than-expected extension in private sector credit, and the expansion in forward looking new vehicle sales orders.

In further support of a relatively positive performance of the South African economy, three of Sake24 and BoE Private Clients’ four provincial barometers showed year-on-year growth in August.

The barometers measure business activity levels in Gauteng, the Western Cape, the Eastern Cape and the Free State. They indicate that during August the economies of the Eastern Cape, Gauteng and the Western Cape showed year on year growth, with only the Free State lagging relative to August 2009.

Economist Mike Schüssler, who compiles the barometers, notes however that virtually across the board activity levels remain far lower than the levels seen three years ago, with only the government sector showing an increase in activity over the three year period.

“We cannot say that the country’s economy has entered into a growth phase, but is in the midst of a recovery. It will however, take a while before we reach the levels seen in 2008,” he says.

On the more negative side, Owen notes that the PMI fell to 48.4 in September from (50.3 in August), indicating a challenging environment for the manufacturing sector and a potential contraction in output. He also points out that employment prospects in the vehicle component manufacturing sector continue to look dire, with the employment subcomponent still pointing to job losses.

Turning to the global economy, Owen says that the size of the fiscal consolidation required in the developed economies, and the fact that such consolidation must take place simultaneously across many countries, will significantly reduce employment and economic activity in these economies. While the outlook for emerging market growth remains favourable in comparison, the domestic economy cannot be unaffected by fiscal consolidation in the advanced countries.

“Given the uncertain global environment we remain cautious on the prospects for the SA economy, but we are encouraged by the SARB’s interest rate cut and the continued recovery in credit and money supply aggregates,” he concludes

 
 
 
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