This will be a year of ‘muddling along’

2012-01-28 10:23

Economists are telling us that 2012 will be the year of ‘muddling along’ as Europe flounders. Exports will decline, inflation will rise on the back of imported inflation, household debt will continue to dog us and reduced consumption could put the brakes on a once buoyant retail boom. Thandeka Gqubule and Andile Ntingi give a broad overview.

The rand
Currency strategists in South African banks fear that the local currency is overvalued by about 15% and expect it to weaken in the year ahead.

Rand levels will play out against a weakening current account and a stronger US dollar. The rand has been hovering at around R7.26 to the dollar.

The petrol price
This week’s fuel price hike could be a signal of things to come. While filling up tanks on Tuesday, it would be prudent to consider that the oil price will be subject to further fluctuations with upward pressures being the dominant theme in 2012 – making goods and services more expensive.

These pressures include the impact of the deteriorating relations between Opec member Iran and the rest of the world, and international investment bank Goldman Sachs predicting Brent Crude prices as high as $130 in the course of the year.

South African mining companies are keeping their ears to the ground for the direction that the ANC national executive committee is likely to take on the issue of resources nationalisation next week.

The influential committee is set to table a document on the issue and begin preparing the party for a position to be taken to the ANC policy conference in June.

The mining industry will gather in Cape Town early next month to discuss issues pertinent to the sector. The nationalisation debate is expected to dominate the discussions.

With volumes of some of our most significant exports, such as platinum and palladium, falling due to the financial crisis faced by our largest trading block Europe, the economic outlook has turned grey.

South Africa has the world’s largest platinum deposits and it is expected that prices of the metal will be depressed throughout this year due to a decline in demand from Europe.

Professor Adrian Saville, a senior economist, told an economic forecasting conference in Joburg this week:
“Because platinum is the main input for catalytic convertors for cars, and Europeans will not be buying cars, platinum exports will be negatively affected.”

Reuters news agency reported this week that the platinum price would languish at about $1?610 (R12?600) an ounce on average throughout the year. This would mean a significant decline as the price has come down from $1?900 an ounce during the year.

There is also a speculation that South African producers may continue current levels of platinum production and stockpile the metal, and further increase measures to meet a potential increase in Asian demand for the metal for the production of jewellery. If the Asian demand becomes manifest, then it could offset sluggish eurozone demand for platinum.

The economy
Stormy weather is predicted as these indicators and others have caused the International Monetary Fund to
re-estimate South Africa’s growth potential for the year ahead.

The financial institution has revised the nation’s projected growth downwards, from 3.6% to 2.5%.

Speaking from the World Economic Forum in Davos-Klosters, Finance Minister Pravin Gordhan said: ”Even the economics profession is in crisis and forecasting is not always right.”

As fears of a slide-back into recession in the eurozone and poor economic data comes out of the UK, the South African rand slid against the US dollar this week.

Indications are that South African companies and the government will pursue an emerging market focus to hedge against the effects of the slowdown in the developed West. Economies such as China and India are showing healthy growth rates and have the capacity to absorb South African resources.

The Brics (Brazil, Russia, India and China) members will increasingly play a significant role in South Africa’s international relations and economic diplomacy in this direction will be stepped up.

With Brazil having taken over from the UK as the world’s sixth- largest economy, Saville points out that two of the world’s fastest growing economies – Zambia and Angola – are on the African continent. Zambia grew at a rate of 43% last year.

Saville says that not only will countries like South Africa have to look to new markets and partners, but that significant shifts to the traditional way of doing business have occurred, challenging the country to change its thinking.

“Credit-based banking is over, the days when central banks could print money to solve deeper economic problems are gone and the banking system as we know it is broken,” he says.

Saville further warns that Europe will not be able to grow its way out of the debt crisis.

Economists agree that the problem of the security of electricity supply needs to be addressed if we are to survive the current global economic crisis.

But they say it is a positive factor that most South African corporations have strong balance sheets.

“In this turbulence this is a great opportunity,” Adrian Saville says.

He urges the country to look at fixing our ailing education system and improving the level of domestic saving.

Analysts are concerned that the government is moving at a snail’s pace to implement decisions in the run up to the ruling African National Congress’s policy and elective conferences in 2012, where the expropriation of prime farmland (without compensation) and nationalisation of mines are sure to be hotly debated.

Analysts have also noted that implementation of the ambitious New Growth Path (NGP) economic policy appears to have been overshadowed this year by the debates on mine nationalisation and the ANC succession.

Banks expect emerging markets such as Brazil, Russia and Indonesia to cut interest rates in a pre-emptive step to support growth. South Africa may follow suit and cut interest rates to boost growth.

The local economy grew at 1.4% in the third quarter of last year.

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