Recent South African Economic Indicators Warn Against Over-Optimism

The latest short-term indicators point to a fragile and slow recovery in South Africa, despite high confidence levels in the economy.

IHS Global Insight Perspective

Significance
Confidence levels in South Africa are likely to be scaled down after the football World Cup tournament as macro fundamentals are slow to recover.
Implications
Consumers' ability to take on debt is limited. The strength of the rand is benefitting inflation trends but hindering a manufacturing recovery, while steadily rising international oil prices are adding to transport costs, which could put upward pressure on prices further down the line.
Outlook
Slow GDP growth of 2.8% is expected for 2010, with benign inflation and unchanged interest rates.

Leading Indicator Up...

According to figures released by the South African Reserve Bank, the leading indicator, at 125, is back to a level last seen in mid-2007 and very close to the peak of the previous cycle of 127.5 in July 2006. Still, only half of the contributing series are making positive contributions to the overall leading indicator. Confidence is one of the positive contributing factors: both business and consumer confidence are rapidly recovering the losses seen during the recession.

...But Demand Fragile

Nevertheless, the data are still pointing to an extremely fragile demand environment. Households' financial situations are still under pressure, with data from Statistics SA indicating that although the number of insolvencies in February was down 8% year-on-year (y/y), it was still up 37.5% month-on-month (m/m). It must be kept in mind that these data lag behind the cycle, but they provide an indication that the overburdened consumer's financial situation is still quite strained. This point is underscored by still contracting private credit growth and disappointing retail figures.

Recent monetary loosening and indications of an improving wealth position point to better demand conditions later in the year. In this regard the Absa house-price index has already shown a 3.3% y/y real increase in February, mainly driven by a recovery in prices of small houses. The JSE all share index stood at 28,199 in March 2010, up from the low of 19,658 in March 2009 and not far off the peak of 32,362 in May 2008.

Overall price increases in the economy are also expected to be benign as the weak demand conditions and strength of the rand, coupled with low food inflation, negate upward pressure from increased fuel and other administered prices. This will add to a beneficial environment for improved domestic demand.

Construction Lagging on Weak Private Investment

Manufacturing recovery, after the initial inventory boost, has sunk back slightly on the back of a slow domestic demand recovery and the strength of the rand. Construction, a lagging indicator, is reflecting depressed conditions in this sector. The number of residential building plans passed were down 32.3% on a three-month annualised basis in February, while the number of non-residential plans passed fell 56.7% in the same month. Although this indicator is historically quite volatile, these figures reflect low confidence levels in the sector. The FNB/BER civil construction confidence index dropped to 25 in the first quarter of 2010 from 39 in the fourth quarter of 2009 as construction activity ahead of the 2010 football World Cup has ended and private investment is expected to show a recovery only once demand picks up significantly.

Outlook and Implications

The South African economy is currently subject to a range of diverse forces. Factors curbing demand include consumers' weakened financial positions following the recession and limited leeway to take on new debt, while an improved inflation outlook and accommodating monetary policy are setting the scene for increased spending later in the year. Heightened anticipation surrounding the football World Cup is boosting confidence levels, which are bound to be scaled back once the euphoria associated with the tournament dies down. Private-sector investment will take its cue from the recovery in demand, while exports are bound to benefit from a more sustained global recovery.

Nevertheless, slow growth in the Eurozone (South Africa's main export partner), the strength of the rand, rising fuel prices, and weak service deliveries from the public sector remain headwinds for the economic recovery. IHS Global Insight therefore still expects slow GDP growth of 2.8% for 2010.

In this environment, it is unlikely that the monetary authorities will lower interest rates any further, except in the event of further rand appreciation. The global cycle is already heading towards tighter monetary conditions, while improved demand locally is likely in future. Interest rates are, however, expected to stay at current levels well into 2011 on the back of the slow economic recovery.