‘Solid’ economic growth for 2010: OM

20 January 2010

Although likely to remain subdued in the opening months, there is a good chance that economic growth could be surprisingly solid, with South Africa ending 2010 with annual GDP growth of over 3%, says Old Mutual chief economist Rian le Roux.

“The combination of a recovery in consumer demand, ongoing robust public sector spending, an end to the cycle of destocking, moderate export gains and the [2010 Fifa World Cup™], could combine to generate a surprisingly robust acceleration in growth during the middle quarters of 2010,” Le Roux in a statement this week.

“We could even see another interest rate cut from the Reserve Bank adding to the positive conditions, should inflation surprise on the downside and the rand remain strong.”

Global recovery ‘solid’

Le Roux pointed out that the global recovery is solidly underway, and added that he believed the risk of a “W-shaped” downturn was relatively small.

This means South Africa will benefit from revivals in both the developed and emerging markets, particularly China, helping underpin export volumes and prices of its commodity exports.

Not only will this help the trade deficit, which Le Roux predicted should stay steady at around 4.5% of GDP this year, but the country should also continue to attract foreign capital inflows, so that the rand depreciates only moderately against the US dollar over the year.

Inflation, interest rates

Le Roux added that inflation should also remain under control for the year, driven by the stronger rand, lower food prices and weak consumer demand. Inflation pressures continue to remain though, arising especially from Eskom’s proposed electricity tariff hikes.

“Eskom will prove to be a thorn in the side of the economy for many years, probably throughout the first half of new decade,” he said.

With inflation relatively tame for now, Le Roux said the most likely scenario was for interest rates to remain unchanged (with prime at 10.5%) for all of 2010.

However, the Reserve Bank could surprise with a 50 basis point rate cut – possibly in the first quarter – should consumer spending prove particularly sluggish or inflation especially benign.

Outlook for 2011

However, in 2011 a more robust growth environment and gathering inflationary pressures could see rates starting to rise again, Old Mutual said although the timing and speed of the next tightening cycle was hard to predict with any accuracy at this stage.

“So after the year of big macroeconomic surprises that was 2009, on first examination our forecasts for 2010 paint a much quieter scenario – with relatively steady inflation, interest rates, currency and economic growth ahead,” Le Roux observed.

“This should be welcome by most South Africans. However, experience tells us that there are always unexpected shocks from some source, and this year will probably no different.”

SAinfo reporter