Dear Members,

Garbage in: garbage out.

Like everything else, what you get out is entirely dependent upon what you put in.  Do you arrive late and leave early, your time grudgingly given to meetings? Or do you arrive in time to meet people before the formal session? Do you participate in discussions, pay attention to how you might be of assistance to other members, or do you find it hard to disguise a lack of enthusiasm? Do you prepare a short, relevant introduction to your business, or do you just wing it? Do you treat it like a business meeting, or view other members as strangers?

SARB QB shows demand-side gains further traction in Q1, C/A deficit widens.

In yesterday’s expenditure-side GDP data, the most striking feature was the 12.1% q/q saar jump in gross domestic expenditure. This compares with a rise of 4.9% in the final quarter of last year, with all of the major components showing signs of renewed strength. Critically, household consumption growth jumped by an impressive 5.7% q/q saar in Q1 10, up from the prior quarter’s 1.6%. This surge in household consumption expenditure was underpinned mainly by a 5.1% q/q increase in real disposable incomes.

On the investment front, gross fixed capital formation grew by 0.2% q/q in Q1 10 thanks, in part, to the push on final preparations for the World Cup. GFCF had fallen in each of the last three quarters of 2009. While the improvement in overall investment growth is encouraging, we believe it may still take some time for gross fixed capital formation growth to show significant resilience given the amount of slack that was built up in the economy during the recession. 

The Quarterly Bulletin also contained a surprise in that the current account deficit jumped to 4.6% of GDP, above Q4’s 2.9% and significantly higher than expected. Looking at the main components of these quarterly annualised figures, the 1.7% of GDP deterioration can be decomposed into a 1.5% of GDP deterioration in the trade account, and a 0.3% slip in the services account, with transfers flat and net income improving by about 0.2% of GDP. Before raising a ‘red flag’, we point out that when looking at a measure of actual flows through the current account during the quarter, this seasonally adjusted and annualised mapping in the headline figures can sometimes obscure the actual movement within the period. If we consider the actual non adjusted, non-annualised figures, South Africa’s trade balance slipped from +R1.6bn in Q4 09 to – R1.1bn in Q1 10 – a deterioration that looks far less dramatic.

SA PPI continues to trend higher in May.

 South African PPI continued to move higher in May, rising 6.8% y/y following April’s 5.5% rise. Base effects together with robust commodity prices remain the core reason behind the strong upward trend in PPI and should, in our view, continue to keep price increases relatively elevated for the remainder of 2010 as the global and domestic economic recoveries proceed.

Further out, our concerns over high administered price increases are likely to keep prices at the factory gate relatively sticky as manufacturers could find it difficult not to pass on some of their rising input costs onto consumers, in our view.

Our outlook for monetary policy remains unchanged, where stronger real economy indicators and a global focus on keeping monetary policy looser for longer, should see the SARB comfortable with its current policy rate stance. We therefore look for the policy interest rate to remain unchanged at 6.5% for the remainder of the year.

Chilean former finance minister and Harvard panel member suggest faster deficit reductions for SA.

Speaking at a function last night, Chile’s former finance minister Andres Velasco and Harvard professor Richard Hausmann said that the government needs to cut its budget deficit faster than it currently plans to do, through lower spending. This was suggested in order to create space for “lower interest rates, a more competitive currency and stronger economic growth”.

The government’s current plan is to cut the budget deficit to around 4% by 2013 from the 2009-10 preliminary budget deficit outcome of 6.7%.

We maintain our view that although there may well be a global push towards deficit normalisation, SA’s relatively favourable starting point in terms of debt levels means that an explicit tightening of fiscal policy through hiking existing taxes or cutting expenditure remains unlikely.

Rather, for example, the introduction of perhaps new consumption based “green” taxes or not fully compensating tax payers for the effects of bracket creep is a more likely implicit way of tightening fiscal policy as the tax burden creeps modestly higher in the coming years.

ABSA

Chamber Greetings,

Colleen Till