ECONOMY: Positive Economic Signals, But Caution Remains the Watchword
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“Despite the lower interest rates, the recovery in consumer spending is still fragile,” says BoE Private Clients Chief Investment Officer Daryll Owen.
Owen notes that all domestic asset classes posted positive returns during April, with equities faring best with a return of 2.24%. Furthermore, the trade account returned to surplus in March following two months of deficits, as exports rose faster than imports.
“Export growth is expected to continue to be supported by demand for commodities and firmer growth in the months ahead,” Owen predicts.
The South African FTSE All Share Index also delivered a positive return of 5.3% in USD, outperforming both the MSCI Emerging Markets and developed market indices.
However, while retail sales were up over the three months to February, Owen notes that seasonally adjusted month on month figures where still down 1%, a sign that consumer recovery is still under pressure.
He says that PSCE for March of 5.1% suggests that the recovery in credit demand remained slow and subdued. CPI inflation rose to 4.1% year-on-year in March, from 3.7% the previous month.
“Given that rising global food and fuel prices, and high administered costs are the main drivers of inflationary pressure, an early tightening in monetary policy will do little to contain inflation and could merely impact negatively on economic growth,” says Owen.
“We do not support the view that the SARB may act pre-emptively by hiking interest rates in the second half of the year, and believe that hikes will be postponed until 2012 at the earliest. The caveat, however, is that if the rand were to weaken significantly from current levels, the SARB might feel obliged to hike rates.”
Says Owen: “Although we remain cautious on the prospects for the SA economy, we recommend a slightly overweight allocation to equities at the expense of cash.”
Globally, Owen notes that while the US economy is showing mixed results it is still expected to show accelerated growth over the course of this year into 2012. The biggest near-term risk to the economy is a spike in oil prices. While debt worries remain elevated in Europe, most of the risks have been priced in.
At the provincial level, the Sake24 and BoE Private Clients’ provincial barometers (covering Eastern Cape, Western Cape, Gauteng, KwaZulu-Natal and the Free State) - showed a spike in economic activity levels in all of the provinces measured during March 2011 – with national government expenditure reaching a high of R55 billion.
Mike Schüssler, economist at economists.co.za and compiler of the indices, attributed the sharp increase to a last push by authorities to spend their unallocated budgets before the end of the state’s financial year.
“This month saw significant spikes in public spending as opposed to March last year, and although it is certainly not sustainable, it did provide a welcome boost to economic activity levels in various provinces,” he says.
Schüssler warns however that, while the sharp growth in government spending benefitted the whole economy, it was not sustainable and had to translate into the creation of jobs.
“Less than 41% of adult South Africans are in the workforce and we have some of the lowest employment figures in the world. Growth without employment still does not put money in the pockets of ordinary people,” he says.
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