Economy likely to shrink two percent - Roux
March 6, 2009
By Ethel Hazelhurst
South Africa's economy could contract by as much as two percent in 2009, according to Andre Roux, head of fixed income investment at Investec Asset Management.
At a presentation in Johannesburg on Thursday Roux cited the global banking crisis as the reason for the recession and said there could be no recovery until it was resolved and banks globally had resumed lending.
In his budget in February Finance Minister Trevor Manuel forecast domestic growth of 1.2 percent in 2009, followed by three percent growth in 2010.
However, Roux forecast "at least three years of sluggish or negative growth globally", with negative implications for South Africa
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Statistics SA reported in February that gross domestic product (GDP) shrank nearly two percent in the fourth quarter of 2008. Two consecutive quarters of contraction are generally considered a recession.
Against this backdrop, Roux predicted the Reserve Bank would cut its official repo rate to as low as seven percent - possibly starting with a full percentage point cut before the scheduled meeting of the monetary policy committee in April and a similar cut at the meeting. He was surprised a cut had not come through already, in light of data released in February.
Reserve Bank governor Tito Mboweni has cut the repo rate by 1.5 percentage points since December 2008, after a total five percentage point hike starting in June 2006. When he made the most recent cut in February he raised expectations of a further cut ahead of the April meeting.
Roux said recent events had shifted expectations that government bailout packages would help banks stabilise and keep the global recession short and sharp.
The likely scenario now, he said, was that a delayed resolution of the crisis would starve firms of credit and increase defaults, while the stimulus efforts would fade quickly and global GDP would decline further, resulting in a three-year recession.
Although South Africa was fundamentally in better shape than many faltering economies, it could not escape the impact.
Roux compared the recession to those experienced in South Africa in the early 1980's and early 1990's. But he said the "massive slowdowns" of up to five percent at those times would not be repeated, because two "shining sectors" of the economy - agriculture and construction - were performing well.
But he warned that the recession could be protracted.
On the positive side, the sudden reversal in growth was taking upward pressure off inflation. He predicted consumer inflation would return to the 3-6 percent target range in 2009. It would remain there for some time because there was unused capacity in the economy, built up during the recent strong expansion.
Inflation risks were to some extent being replaced by deflationary pressures. Inflation would soon fall to 5.5 percent, allowing the Reserve Bank to cut rates further, he said.
The bank's policy in the past was to maintain a real repo rate - the nominal rate minus inflation - at about 3.5 percent. But in the current circumstances it was likely to preserve a real rate of only 1.5 percent.
Central banks in advanced economies have cut the rates at which they lend to the private sector close to zero. The Bank of England yesterday cut its rate in half to 0.5 percent. The US and Japan have interest rates even closer to zero.
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