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The economy in 2012

The South African economic outlook for 2012.

The severity of the global economic slowdown holds the key to the South African economic outlook in 2012. Not only will this to a large extent determine the extent of growth slowdown in SA, but it will also arguably be the key driver of the rand’s trajectory, which is in turn a critical determinant of the inflation and interest rate trajectories.

Elna Moolman

We are more bearish than the consensus about the prospects for the SA economy in 2012, expecting at best 2,8% growth. The likely underperformance of the economy relative to government’s optimistic 3,4% forecast, is one of the reasons for our concern about a further deterioration in the fiscal metrics, where we expect the 2012 budget deficit to be about R20bn (or 0,4% of GDP) larger than government’s latest prediction. In addition to the anticipated revenue underperformance, we also expect higher than forecast growth in the government wage bill to put pressure on the budget deficit.

We forecast an escalation in consumer inflation to nearly 7% early in 2012.

In the near-term, we expect intense upward pressure on inflation from food prices. This should be followed by the delayed pass-through from the rand’s depreciation in the latter part of 2011. We expect inflation to exceed the central bank’s 3-6% target range for most of 2012, but it should re-enter the target range from the end of 2012 on a sustained basis.

Our forecast that the rand will recoup some of its losses in 2011 is a very important assumption underpinning the retreat of the inflation trajectory in the medium term. SA consumers have strongly exceeded expectations in the post-recession recovery, supported by multiple tailwinds.

However, the boost from these tailwinds is broadly speaking fading. The explosion of the government wage bill, which grew by nearly 25% in 2010/11, was directly responsible for nearly half the growth in households’ disposable income. This cannot continue and even if government modestly exceeds the projected 6,5% annual increases in the wage bill in the next year, it would be a very abrupt deceleration in this regard. Sharp increases in the costs of non-discretionary spending items such as food and energy will further erode consumers’ real spending power in respect of discretionary goods and services.

Political and policy debates will shift to the forefront in 2012 with the ruling party’s policy conference in mid-2012 and its leadership election at the end of 2012. While there will be intense debate and frequent media coverage of contentious policy issues we do not expect any big economic policy changes.

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