Nicky Weimar, Senior Economist: Nedbank

With news that South Africa is officially in a recession, and the Reserve Bank is coming to an end of its rate cutting cycle, TradeInvestSA spoke to Nicky Weimar, senior economist at Nedbank, about what this means and what we can expect in the South African economy over the next year.

The Reserve Bank expects no more large cuts in interest rates. Where do you see the rate cycle ending?

The Reserve Bank said - at the last meeting in May - that in their opinion monetary policy has done everything it can do to cushion the effect of the recession, especially given that inflation is remaining stubbornly high.

We believe that growth is probably going to surprise on the downside and that that will probably result in further interest rate cuts.  While the consensus is for another 50 basis points cut later this month, our feeling is probably 100 basis points in this cycle. So another 50 this month and maybe another 50 in September or October.

How long will it be before these cuts start to have an effect?

For interest rate cuts to have an effect what you’re really hoping will happen is that consumers will demand credit again. It’s that act of borrowing and spending that really boosts economic activity. So for interest rates to have an effect this time round will take a lot longer.

On average it’s anything between 12 and 18 months, but when you’ve got unemployment rising and asset prices falling, cutting interest rates is not going to convince anybody to borrow and spend. So when will it start to have an effect; probably at the end of the year or early next year.

Inflation is still high. Do you expect the figure to come down in the near future?

We see it dipping into the target band around the end of the third quarter, beginning of the fourth quarter. It’s proving sticky so it’s coming down slower than most of us anticipated, but it’s not like it’s not coming down.

There is news of sharp falls in agricultural prices, which eventually will work through to the consumer. Initially companies are resistant to sacrifice their margins, but ultimately if demand implodes maintaining a margin is not going to help them much. When price becomes the main thing that moves stock off the shop floor, you’ll start seeing it coming down quicker.

First quarter GDP signalled an official recession. What kind of impact will that news have on the economy?

We knew certain areas were very weak but we didn’t know how much that would pass through into the GDP numbers. But essentially what you’ve got is an implosion in mining and manufacturing, and these are big employers.

The news that those sectors are very vulnerable has been out there a while. And for the rest of your business community and the rest of your consumers the news that we’re contracting by more than 6% will make people even more cautious. That’s going to be the effect of it.

Do you think that it was largely expected, and if so, does it signal the worst is over for SA?

We’ve got two quarters of further contractions, but that (6.4%) certainly is the fastest pace, and we don’t see it falling at that pace again.

Headlines like the “worst GDP figure for 25 years” dents consumer confidence. How important is confidence in an economic slump such as this?

Confidence in a market economy is everything, whether it be consumer or business confidence. If anything, the financial crisis is an illustration of what happens when confidence completely evaporates.

You set in motion a vicious cycle where you just have further cutbacks in spending, further falls in credit demand, higher defaults, failing banks, failing companies, rising job losses, that sort of horrible vicious cycle which nobody wants is really the consequence of confidence falling.

Some property economists suggest the market will bottom out in the second half of this year. What is your view?

We really don’t think so. Property tends to be a lagging indicator because there’s a lot of resistance in property initially. Sellers will still be very resistant to cut prices and that resistance can often last for a very long time.

But at some point they start to compromise on price, and when they do, that gains momentum and buyers tend to postpone their purchases to get better prices. You have that cycle where they push prices down to the point where everybody starts to see value and starts to buy again.

Do we think property is there? I don’t think it’s anywhere near there, I think it still needs to undergo a fairly substantial adjustment. And for us, the property market will see that in 2010, we don’t see a recovery this year.

The rand has since strengthened from its lows last year. Do you see this trend continuing?

The rand has actually been amazing if you consider that we run a current account deficit, which means that based on trade activity alone there are always rand sellers in the market and the only way you offset that is to have capital inflow. I think there are maybe a couple of reasons for that.

It is a relative move against a much weaker dollar and the fact that precious metals have generally done quite well in this downturn, and so the rand trades in line with what gold prices do.

There are also a couple of big transactions going through. Indian telecoms company Bharti is buying a stake in MTN and Vodafone is buying a stake in Vodacom. So these big transactions mean the market knows that there are going to be big rand orders out there.

We don’t think that it can continue, we expect the rand will start to depreciate again towards the end of this year and next year. What has been encouraging though is that the rand hasn’t had those sort of sharp, dramatic drops that it experienced between 1996 and 2001, where you lost 30% of the value in 20 minutes. 

Is a strong rand good for South Africa, given that exports are so crucial to the economy?

In this sort of environment the strength of the currency is probably not good for us. It’s good for inflation and good for the consumer, because it contains input costs and you see the prices of goods in the stores coming down. So it’s brilliant for the consumer but it’s not very good for the production side of the economy when a currency strengthens too much.

When global demand has been slashed and most of our competitors have seen their currencies depreciate, we’ve become increasingly uncompetitive, as a result of simply the movement in the value of the rand. So that’s not very good for production or exports.

Are there any positives or opportunities that we can look for in the current climate?

Clearly the world is going to grow in a very different way going forward and there is some unpredictability in that because after every crisis there is an opportunity for people to clean up their act, make major structural adjustments.

Hopefully from a South African perspective we would do the same and for us the focus would be on increasing capacity. We should take this time to get ready for when the upswing returns. As a big producer and exporter of commodities, much of what we do depends on China. And I think there you will see a repeat of what has occurred previously.

China is not suddenly going to de-industrialise or de-urbanise, and as long as urbanisation continues that’s where our focus needs to be.

We remain too focused on the West; they are still our majority markets and we need to change that. We need more diversification of where our products go to, and we also need to send our products to regions that are likely to grow first and that is definitely not your industrialised West, it is the likes of China, India and Brazil and emerging markets.

How do you foresee the economy developing over the rest of the year and into 2010?

Well I think this year is going to be a write-off to put it mildly. If you believe the IMF the world economy is expected to contract by 1.3%, if you believe the OECD it’s going to be closer to 2% or 3%, so those are vicious declines in economic activity.

They expect recessionary conditions to prevail in 2010, but at least for the world economy to start to show modest increases in output. So forecasters are right, we can expect about 2 to 3 years of fairly weak global growth.

What does that mean for us? This cycle we’ve come out of - from 2004 to 2007 - which has been fantastic; that was quite an extraordinary cycle and we’re probably not going to see that for a while. So you can expect the South African economy to contract by about 2% this year, and then we expect growth of about 2.5% or 3% next year.