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SA Outlook: Mired in Mediocrity Sizwe Nxedlana Chief Economist Octo ber 2013

SA Outlook: Mired in Mediocrity Sizwe Nxedlana Chief Economist Octo ber 2013. This time last year advanced economies were faced with a severe loss of growth momentum…. There was a big risk of a Euro Area breakup

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SA Outlook: Mired in Mediocrity Sizwe Nxedlana Chief Economist Octo ber 2013

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  1. SA Outlook: Mired in Mediocrity Sizwe Nxedlana Chief Economist October 2013

  2. This time last year advanced economies were faced with a severe loss of growth momentum… • There was a big risk of a Euro Area breakup • The US was faced with a self imposed fiscal tightening that would have led to recession • Japan was suffering from deflation • The Chinese economy was expected to slow significantly • All this at a time when interest rates were at the zero bound and fiscal policy was constrained by high debt levels

  3. These risks were reduced by experimental monetary policy action… • In the Euro Area, • The ECB promised to act as a lender of last resort to distressed governments • In the US, • the Fed initiated QE 3, buying $85 billion of fixed income assets per month • In Japan • The BoJ announced its own QE programme and is buying assets of $75 billion per month • More recently, central banks have turned to forward guidance and thresholds • The plan is to keep rates low to support economic growth and to keep them there until growth improves

  4. What impact has the central bank policy had?A) Impact on financial markets B) Impact on real economy

  5. Central bank policies reduced bond yields in advanced economies… Source: Bloomberg

  6. Incentivising a global search for yield… Source: Bloomberg

  7. Bond like equities also rallied since 2H 2012… Source: Bloomberg

  8. The same pattern played out in SA…with fixed income assets doing well…until recently…

  9. As have bond like equities…

  10. Experimental central bank action has also boosted real economic growth… • In 1H 2013 • US and Japanese growth has improved • The euro area and the UK have exited recession • After disappointing expectations recent evidence shows the Chinese economy is stabilising • But the recovery is from a low base • Growth is still below trend

  11. South African Prospects

  12. Against the improving environment, SA growth slowed last year… • SA economy was affected by a combination of : • Slower global growth • Violent labour unrest that led to a collapse in mining production in 2H 2012 • We expect the below potential growth to continue in the short-term Forecast Source: SARB, FNB

  13. Why domestic demand is likely to slow further?

  14. Government stimulus can’t continue... Source: National Treasury

  15. Non-mortgage credit extension will also moderate… %yy Source: SARB

  16. Muted private sector fixed investment.. Source: SARB Source: BER, SARB

  17. Only a marginal narrowing of the current account deficit is anticipated

  18. The BoP: Labour induced export underperformance… Source: SARB

  19. The outlook for inflation muddied by the rand

  20. Weak rand keeping inflation high and is also the main risk to the outlook... Forecast • Global inflation is low • Global commodity prices are low • Low SA growth is muting core inflation • The rand’s depreciation is keeping inflation higher than it should be • After peaking above 6% in 3Q 13 we expect inflation to end 2013 around 5.5% and to average 5.8% in 2013 and 5.5% in 2014 • Risk is further and sustained rand depreciation Source: Safex, StatsSA, FNB

  21. Monetary policy: Lower for longer still most likely outcome

  22. SARB held hostage by the rand… • SARB reduced both its growth and inflation forecasts indicating greater concern about growth and lower concern about inflation • SARB does not seem inclined to want to hike rates • Growth is weak and inflation is likely to remain contained on a look through basis • We expect rates to remain unchanged this year and next • Risk is further and sustained rand depreciation with evidence of secondary impacts on inflation • That would lead to rates rising earlier then we expect Source: SARB, FNB

  23. Concluding thoughts… • Global economy healing gradually • SA growth will be below trend in the ST as aggregate demand tailwinds run out of steam (government and credit extension) • How to get out of this? • For sustainable outperformance SA requires improved competitiveness that will promote exports and encourage fixed investment

  24. ENDSizwe NxedlanaFNB: Chief Economistsnxedlana@fnb.co.za0113035357@sizwenxedlana

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