With 2010 around the corner and most South Africans reflecting on a year that has seen an economic recession that spared very few, what does the New Year hold in store for us?

On the one side, there have been those cautioning against an overly optimistic outlook for 2010, while on the other side there are those who are confident of recovery in 2010. The IMF’s World Economic Outlook released in October, foresees a 2.2% contraction in the South African economy for the 2009 year, while they predict only modest growth of 1.7% for 2010. This is in contrast to the 20 other African countries featured in the IMF report, which are all expected to grow in 2009. Despite this negative outlook, the IMF commends South Africa’s fiscal policy and is positive about South Africa’s future growth prospects. The IMF noted the particular resilience of the South African banking sector, while many of the major international banks had to be bailed out by their governments.

Positive signs

There are numerous signs that we can be optimistic. TradeInvestSA spoke to Nicky Weimar, Senior Economist at Nedbank, about what the signs are. Weimar says the manufacturing sector, after being hit very hard by the recession at the end of 2008 and in the first half of 2009, has posted better results in the third quarter of this year, mainly due to the general improvement in the world economy, especially in China and other emerging markets. The mining sector too, is recovering from the recession and helping to lead South Africa out of the doom and gloom. 

Other positive signs include the increased car sales figures, which have finally turned the corner and are increasing on a month-to-month basis; business confidence is improving; trade activity is positive; there is an increase in manufacturing activity; and some companies (22% - according to Manpower’s quarterly survey) are even expecting to hire more workers in the first quarter of 2010.

There have been a number of surveys in the past few months, which have pointed towards a positive outlook on behalf of businesses. Rand Merchant Bank’s (RMB) Bureau of Economic Research (BER) business confidence index revealed an increase in the fourth quarter of 2009 and significantly this was the first increase since the third quarter of 2006. In three of the five sectors featured in the survey, there was an increase in confidence, while the other two sectors only decreased marginally.

The South African Chamber of Commerce and Industry’s (Sacci) business confidence index also witnessed an increase in November, rising to 84.1 points. Sacci’s trade activity figures also remained positive for the third month in a row in November. South Africa’s purchasing managers index (PMI), presented by Kagiso Securities, showed another indication of a positive economic outlook by rising above the 50 point threshold, which signals expansion. The PMI measures sales orders and expectations among purchasers of supplies for factories. It is seen as a good measure of factory output, which accounts for about 14% of South Africa’s GDP.

A cautionary note

It is clear that there are indicators pointing towards a turn around in economic fortunes in South Africa but there is still a lack of certainty as to what will drive economic recovery in 2010. Nicky Weimar says: “At this point, the global recovery appears to be very artificial, mainly propped up by exceptionally easy monetary policy in most industrialized countries and massive fiscal stimulation in most industrialised and emerging markets.  Underlying private sector demand remains constrained by weak confidence, high debt levels, dysfunctional credit markets and high unemployment.  Given the scale and complexity of these structural problems, the global recovery is expected to be patchy and very slow, but should continue provided the stimulation packages are not withdrawn too quickly.”

Weimar adds that if stimulation packages do indeed remain intact, the local mining and manufacturing sectors will be buoyed by exports until the anticipated injection of the 2010 FIFA World Cup arrives around the second and third quarters of the year.  Consumer spending is likely to remain subdued in early 2010, before picking up gradually from around the second quarter as confidence slowly improves, conditions in labour market stabilises and debt levels ease to more manageable levels. Once consumer spending starts to pick up, the broader services industries (which include wholesale trade, retail trade, hotels, restaurants, finance and real estate) should start to recover in a more convincing fashion.

As well as this uncertainty there are also some possible stumbling blocks. Weimar notes: “The global economy remains a concern.  The latest troubles in Dubai, Greece and Spain are perhaps timely reminders that excess debt levels not only remain a problem but are widespread.  It is also clear that it will take some time to unwind these debt levels and global growth is likely to be the main casualty of this painful but necessary exercise.” 

“Locally, the key risks remain adverse policy developments in the form of greater state intervention in key markets; higher costs of production due to rising inefficiency; an ageing capital stock; limited capacity in transport, logistics and electricity supply; and continued strain of skills shortages.  As the world economy recovers and investor behaviour normalises, it is possible that investors may start to look at South Africa with a critical eye again and decide that the risks are mounting. This could result in some capital flight and in turn could result in a sharp correction in the rand (very possible from these very high and oversold levels), which could send inflation higher and prompt a rise in interest rates, knocking consumer confidence and stunting the recovery before it gains any real momentum.”
 
The strength of the Rand has already impeded growth projections, with it being one of the primary reasons for the IMF’s pessimistic forecasts for South Africa’s growth prospects. The Rand’s strength has helped improve the current account balance but it has depressed exports and with certain industries like manufacturing already battling, this decreased demand has caused further strain. Lastly, inflation predictions for next year are relatively positive with many suggesting the inflation rate is likely to be just above the 3-6% target area and returning within the band in late 2010 or in early 2011. There is one major qualification for these estimates however. If the proposed Eskom price hikes do go ahead, then these inflation estimates will rise and the increased costs for both individuals and businesses will dampen spending power.

Looking forward with optimism

There are numerous concerns and reasons to remain cautious but it is also clear that South Africa can look ahead to 2010 in a more positive light. In the most recent sign of positivist sentiment, the Merchantec CEO Monfidence Index, released on Wednesday 9 December, witnessed a two point rise to 60.32. This is a forward-looking survey that measures the current and expected conditions over the next six months through questions directed at 100 executives of listed companies.

It is now a question of waiting on a number of factors to come together so that a recovery builds momentum during the course of 2010. In the mean time Weimar suggests caution for businesses, particularly small- to medium-sized ones, in 2010:  “The worst may be over, but the recovery is NOT expected to be a vigorous one, but rather a slow crawl out of the rabbit hole of recession." Weimar therefore suggests that businesses remain vigilant in containing costs, working on improving efficiency and retaining critical staff and skills, staying cash heavy and avoiding taking on too much debt.