Ethel Hazelhurst
The world can look forward to slow growth, not low growth. That was the good news from economists at two separate presentations in Johannesburg yesterday.
Despite a range of threats to the global economy, Investec portfolio manager Chris Freund and Absa economists Jeff Gable and Gina Schoeman said the world was not on the brink of another recession – and predicted life after the soft patch.
Freund, who manages the Investec Balanced Fund, said the cooling of China’s economy, the timing of the Greek default and what would happen after the soft patch were the big issues troubling investors.
Gable, the head of macro and fixed income research at Absa Capital, said two unforeseen factors at the start of the year were the surge in the oil price and the natural disaster in Japan. These events had “shocked our forecasts lower”, he said, to 4 percent global growth from an earlier estimate of 4.3 percent.
The International Monetary Fund (IMF) last month left its global forecast “broadly unchanged at 4.3 percent”.
Freund said, despite recent disappointing economic data, “markets don’t believe the soft patch is for real”. He cited the shape of the yield curve – a line that shows the yield on securities with a range of different maturities. When the yield on longer-term bonds is higher than on short-term bonds, it is a sign the market expects growth.
He said, given the spread, or gap in yields, between 10-year and 30-year US treasuries, it was clear the market was not expecting a recession.
The negative US federal funds rate – lower than the inflation rate – and easy credit conditions also make a US recession unlikely. In addition, cash-flush US companies have started investing. And Freund predicted a recovery in the US motor vehicle market, once Japanese manufacturers recovered and normal supplies of vehicles were resumed.
Freund said the bailout for Greece was positive: “the costs of delaying the inevitable default to a calmer time, when markets are more capable of handling it, are far less than the costs of fixing a financial meltdown right now”.
As to China, he said the authorities had hinted at monetary easing and, if the economy slowed further, they would be in a position to act – reversing their earlier moves to tighten credit conditions.
Gina Schoeman, the lead economist on South Africa at Absa Capital, said her forecast for domestic growth was unchanged at 3.9 percent for the year. The IMF last month raised its South Africa forecast from 3.5 percent to 4 percent.
Schoeman said a problem for the local economy was that, while consumers had been spending, business confidence remained low. And, while corporate savings were rising, corporates had not been investing in factories and machinery.
But she said there were early signs of improvement, with credit to corporates rising and companies starting to build inventories at a faster pace in the first quarter.
Schoeman said that by next year growth in the economy might be more evenly spread – with a bigger contribution to growth coming from production, rather than the present dependence on consumer demand to drive economic growth.