Absa: Quarterly Economic Perspective

Absa: Quarterly Economic Perspective Q2 2011.

Searching for symmetry

• From 2.8% GDP growth in 2010 we look for growth to accelerate to improve to 3.8% y/y in 2011 and to 4.2% y/y in 2012.
• A key feature of the current growth trajectory is its unevenness, as consumers have done most of the work. Though not surprising given high nominal wage settlements, low inflation and 650bp in interest rate cuts (which together boosted real incomes and reduced debt servicing costs) a sobering aspect of the economic recovery has been persistent weakness in fixed investment spending.
• Evidence of uneven economic growth has shown up in still-low corporate credit growth (household credit has performed more strongly), choppy commercial vehicle sales (passenger vehicle sales are doing well) and a substantial narrowing of the current account deficit in Q4 10 (to 0.6% of GDP thanks to high levels of corporate savings coupled with weak investment).
• We expect some improvement in fixed investment spending through 2011 (business confidence is picking up and inventory restocking is set to commence), but the real boost to GDP from investment only comes in early-2012 to generate more broadly-spread GDP growth.
• The path for credit and investment is key to interest rate decisions through 2011, we believe, and a major reason why we expect the repo rate to remain on hold through the year. We expect headline CPI to rise to 5.6% y/y by year-end and above 6% in H1 12, but note that CPI is to be driven mostly by higher food and oil prices while core inflation (CPI excluding food, non-alcoholic beverages, fuel and energy) lags behind. For this reason we think the Reserve Bank tolerates rising supply-side price pressure, and only hikes the repo rate in January 2012. We expect 250bp in rate hikes between January and September 2011.
• We expect portfolio outflows to trigger a slightly weaker ZARUSD by year-end (R7.30/USD).

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