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Old Mutual Investment Group’s 2015 economic outlook: Johann Els – senior economist, Old Mutual Investment Group

Looking for Inflation below 4%, current account improvement and a more stable rand.

SIKI MGABADELI: Fewer strikes, better GDP growth, a more stable rand and stronger consumption spending growth off the back of a lower oil price are some of the positives that Old Mutual Investment Group expects for South Africa in 2015. My colleague Hanna Barry spoke to their senior economist Johann Els and began by asking him whether the drop in the petrol price and a sharply lower headline inflation figure actually translates into actual economic growth at the end of the day.

JOHANN ELS: Yes, you know, real GDP growth, the total economic growth, is stable under pressure because of all those structural issues we had in the economy and perhaps because of the outlook that we still do expect the electricity shortages this year.
   But underlying that… the consumer spending outlook is hugely improved this year, thanks to the lower oil and petrol prices. The consumer will save roughly R20bn this year on its fuel bill, and that’s like a huge stimulus package or tax cut, even, in terms of consumer spending that suddenly has this big benefit.
   On top of that the inflation number has come down quite significantly. We see inflation by April/May close to 3%. So suddenly with nominal consumer income growth still stuck around 7, 7.5%, there is a huge real gap in terms of positive real consumer income growth. That drives consumer spending. So suddenly the fundamentals, at least for the shorter term outlook this year, and maybe into next year, look a whole lot better than what we’ve become accustomed to over the last few years.

HANNA BARRY: And what is Old Mutual’s prediction for GDP growth for this year?

JOHANN ELS: We’ve got 2.5% GDP growth this year. Now, underlying that, we did up our consumer spending forecast from below 2% to 3% – 2.9% to be exact. That’s a interesting increase from last year’s 1.2%. We didn’t up our GDP forecast. That’s unchanged from what we had last year – for this year 2.5%. So it’s an uplift from last year, but we didn’t up it for the reason that electricity outages might impact negatively on production.

HANNA BARRY: What impact do you expect the lower oil price to have on South Africa’s current-account deficit, which is currently around I think 4.5% of GDP?

JOHANN ELS: Well, the average for last year was close to a 6% deficit. Because oil makes up 17% of our imports, just the lower oil price has got a big beneficial impact on that. So we are forecasting from that 6% deficit last year close to a 3.8% deficit this year. So it’s a significant improvement and that is one of the big things that ratings agencies and investors have been looking at. It has been impacting the currency. So if you have a situation where suddenly one or two [indistinct]… inflation is looking better, consumer spending is looking better; all these underlying things are looking better this year, then I think the rand can stabilise – to strengthen, even, quite a bit during the course of this year. That will add to all the positives in terms of when the Reserve Bank starts looking at interest rates.

HANNA BARRY: Two things there. Firstly, let’s talk about the rand. You talk about stability. What counts as a stable rand – let’s say against the dollar?

JOHANN ELS: Stable to stronger against the dollar, perhaps. I wouldn’t be surprised to see it turn the handle on the rand versus the dollar – in other words, R10-something. I’m not clever enough to say it’s R10.20 or R10.50 or R10.80, but from where it is now around R11.50 the rand can strengthen a bit against the dollar. It has already strengthened quite a bit against third currencies like the euro. And so on a trade-weighted basis the currency can look a whole look better this year.

HANNA BARRY: And let’s talk about interest rates. You mentioned no pressure on the Reserve Bank now to raise interest rates because of that lower inflation figure. Is Old Mutual perhaps expecting a rate cut at all this year?

JOHANN ELS: I don’t think we are expecting a rate cut yet, but I think the debate will move in that direction with the rest of the world in the mode of cutting rates – we’ve seen quite a few in the last couple of weeks and there’s another 20-odd central banks deciding on interest rates this week and a whole number of them will probably cut rates. So there’s some pressure on the Reserve Bank when you have inflation below 4% for most of this year, when you have the current account improving, when you have the rand stabilising and strengthening even. Then it’s very difficult, firstly, for the Reserve Bank to hike interest rates. So I don’t think any hikes are on the cards any more.
   The debate will start about cutting rates. I don’t think they should because that will set us up for a more volatile cycle. Our interest rates are low, as they’ve rightly said, and they want to lift them a little bit. I don’t think they should or need to under this environment; but I don’t think they should cut. So our forecast is for flat interest rates going forward.

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