By Cees Bruggemans
After growing by 3% in 2008 and contracting by some 1%-2% in 2009 mainly on account of an unprecedented vicious global banking and credit crisis and its impacts on our mining and industrial exports, the economy should rebound by some 2%-3% in 2010.
Part of this bounce will be inventory related, but to an important extent it will reflect easier policy stances.
Infrastructure investment will have continued throughout. Increased deficit spending will have kept household spending from contracting unduly. And interest rate reductions will ultimately improve household appetite for consumer durables, though probably held back by slow credit absorption as banks will be slow in giving up rediscovered credit disciplines.
In this cyclical playout, our recovery profile should closely match global developments, though our adjustment will not have been as bad as the 3%-6% GDP declines in America, Europe and Japan, but also not as good either as the modest growth dips in China and even India, before renewed expansion marks all of these economies.
Throughout, our inflation is likely to decline further. With CPI inflation so far having eased from nearly 14% in 3Q2008 to 8.5% in 1Q2009, it is expected to average 7.5% in 2Q2009, 6.5% in 3Q2009 and some 6% in 4Q2009, thereafter falling back into the SARB’s target range, averaging some 5% in 2010.
An awful lot of assumptions are discounted in this CPI inflation forward look. Not least global deflation in parts during 2H2009 and very mild inflation in 2010, a large output gap weighing on inflation domestically, further easing of food price inflation and a Rand exchange rate on balance guiding inflation lower rather than worsening it anew.
Likely negatives include high administered price increases, upward oil price risks, and wage and salary demands that are backward-looking (and resulting settlements that unduly encourage employment and flexible income losses).
Through 1H2009, our labour market wage trend mirrored the high inflation of 2008, with strong unions setting high demands, and settlements in the 8%-10% range, especially in protected employment.
The worsening economy, however, increasingly stiffened employer backbones during 1H2009, with still high wage increases already matched with high employment losses and bonus and overtime cutbacks as employers sought to realistically manage their wage bills.
Such realities will probably keep marking the labour market in 2H2009 and 1H2010. Wage settlements are likely to average 7%-9% in 2H2009, still well ahead of reported inflation even as job cutbacks reach peak intensity.
By 1H2010 wage settlements should have slowed to 5%-7% territory, with the gradually rebounding economy improving productivity, reducing the need for job cuts, and employment stabilizing eventually.
As the new economic expansion takes hold, high resource slack should keep inflation at bay. Even so, commodity strains (shortages), public sector cash flow enhancement through high administered price increases and sticky wage and salary trends (mirrored in slow job growth recovery) will put upward pressure on inflation.
It is prudent to assume throughout a flexible monetary policy stance that will remain determined to contain CPI inflation within an unchanging target of some 3%-6%, even though it may take another year to get sustainably back into this range
Source: Cees Bruggemans, FNB, May 25, 2009.