Absa: Quarterly Economic Perspective

Absa: Quarterly Economic Perspective Q1 2012.

Lower growth tempers the mood.

• A more challenging global economic backdrop emerging in recent months together with some still struggling facets within the SA economy has led us to pare back our medium term growth projections. Following our expected 3.0% y/y growth rate for 2011, we expect softer growth of 2.8% in 2012 (prior: 3.4%).
• The two-speed nature of the economy remains evident as witnessed by the resilient growth rates observed in household consumption which continues to be supported through low interest rates, a more stable labour market, and high nominal income growth. On the other hand, key supply-side sectors have taken a further worrying step back.
• In such an uncertain and concerning global economic climate, downside risks exist to our baseline GDP outlook. However we believe that the current level of policy rates are not restrictive to the country’s growth outlook.
• Inflation remains on an upward trajectory and upside risks have increased since the last quarterly (in the form of currency depreciation and food prices). Inflation breached the upper 6% inflation target band in November and is expected to remain above 6% throughout next year (we forecast a peak of 6.7% in Q2 12).
• With inflation expected to remain above target for longer, and GDP muddling around the 3% mark, our view remains that the SARB is likely to keep rates unchanged until Q4 2012.
• Continued volatility in global financial markets (owing largely to the euro area crisis) is likely to continue to steer sentiment towards the rand and has resulted in our pushing our 3-6m currency forecasts weaker. We now look for the rand to average around 8.10/USD in the first half of 2012, before paring back some of its losses in the second half of the year (H2 average of 7.80). Notwithstanding short term volatility, we continue to view rand fundamentals as supportive (portfolio flows, current account deficit, commodity prices etc).

Outlook: further downside risks force another downgrade to GDP.

In line with a further downward revision to our global growth forecasts (we now expect global growth to measure 3.3% in 2012 from 3.7% previously), we have pared South Africa’s 2012 GDP growth forecast to 2.8% (from 3.4% previously). This is a meaningful change not only in magnitude but also in direction as we now believe that 2012 GDP growth will measure lower than the 3.0% we are now projecting for 2011.

Thankfully, a support mechanism comes in the form of the consumer and here, fundamentals in the form of still relatively high nominal income growth (owing to high wage settlements) and low interest rates (leaving debt-servicing costs low) will be a big help to the economy in 2012. Against a still favourable expenditure-side dynamic however, we believe that the major risks to the economy in 2012 stem from the investment and production side of the economy and here business confidence is already more pessimistic. …

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