2012: Domestic activity to the rescue.

At this time of the year, there is one burning question in the mind of investors and business decision makers alike, that is: what economic conditions can one expect for the year ahead?

With global economic conditions expected to continue deteriorating in early 2012, much depends on domestic economic activity to prevent SA from stagnating or even dipping into recession as is anticipated for Europe this year.

In Risk Watch this month, we focus on the prospects for domestic economic activity as a buttress for the possible negative effect that international economic conditions could have on the local economy.

A key data release in December was the South African Reserve Bank's (SARB) Q4 2011 Bulletin released in the earlier part of the December. One found further encouragement for domestic economic conditions based on household consumption data. Year-on-year (y/y) growth in personal disposable income declined by a marginal -0.2 percentage points to 10.2% y/y in Q3 2011 from 10.4% y/y in Q4 2011.

Remaining well above the Q3 2011 inflation rate of 5.4%, the growth in income explained the ongoing strength in personal consumption expenditure at 4.7% y/y in Q3 2011 from an upward revised 5.4% y/y in Q2 2011.

Although disposable income is likely to deteriorate in the year ahead as a result of the upward rally in consumer prices, consumption growth is expected to remain in positive growth figures, providing a boost to the trade and manufacturing sectors in the economy.

Despite a weaker than expected outcome in GDP, the SARB Bulletin reported an improvement in fixed capital formation in Q3 2011, up to 4.9% y/y in the quarter, from 4.0% y/y in Q2 2011. On a quarter-on-quarter (q/q) basis, investments grew 2.4% in Q3 2011, following a 1.2% rise in Q2 2011.

Although business sentiment has been subdued in recent months, weaker economic conditions provide an opportune moment for long term planning. Growth in fixed capital formation by private businesses increased marginally to 5.4% y/y in Q3 2011 from 5.3% y/y in Q2 2011.

However, it was public sector investment that drove much of the rise, with growth in fixed capital formation by private corporations increasing to 5.8% y/y in Q3 2011 from 2.7% y/y in Q2 2011, whilst fixed capital formation by general government grew 1.2% y/y following a lower 0.1% y/y increase in Q2 2011.

Given the stronger growth in public sector investment activity, one might argue that the economy has turned to fiscal stimulation in anticipation of a weaker economy in the year ahead.

One gains encouragement from this improvement in investment growth.  Positive spill-overs are likely to emerge in the construction, mining and manufacturing sectors in the short-term, which will provide support to the sectors that are likely to be hardest hit by weaker global economic activity.

Furthermore, investment activity is likely to stimulate employment growth in the year ahead, providing further stimulation for household consumption.

Lastly, potential improvements in economic efficiency related to these investments could boost investor confidence in the economy, stimulating investment growth in the private sector.

With both consumer and producer inflation on the rise, monetary stimulation seems to be least on the cards in the year ahead.

The CPI inflation rate breached the upper target band at 6.1% in November, rising by a marginal 0.1 percentage points from October. Whilst PPI inflation declined for the first time this year to 10.1% in November from 10.6% in October, producer inflation is expected to remain high in early 2012, although likely to show some decline due to statistical factors.

Combined with robust retail sales growth (at 7.4% y/y in October), healthy income levels and improving employment levels, the MPC is not likely to consider a further interest rate cut in the first half of 2012. However, the fragility of domestic economic conditions will continue to argue against a rate hike.

 

By Zandile Makhoba.

Econometrix economist.

www.Businesslive.com

 

This article was originally posted on Africa Banking Network

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