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Articles: Markets promise little action in holiday week

Posted by admin on Monday, March 20, 2006 - 08:23 PM

THIS promises to be a quiet week on the local economic front, made shorter by tomorrow’s public holiday.
Ayanda Shezi

Local markets are likely to take their cue from events playing themselves out in the international arena. The only data due out locally this week is the Reserve Bank’s quarterly bulletin for the last quarter of 2005. Although the bulletin is generally a summary of economic events during the quarter, it does provide important information on SA’s current account deficit. In the third quarter of last year the deficit on the current account of the balance of payments widened to 4,7% as a percentage of gross domestic product (GDP), its highest level since 1983. At the time the Bank said: “The trade balance registered a larger deficit in the third quarter as the value of imports expanded strongly, reflecting the needs of a growing economy and the high level of the international price of crude oil.” Brait economist Colen Garrow says a rule of thumb is that deficits on the current account should be 3% of GDP or less, and they need to be comfortably financed by capital inflows. “With the upward trajectory in GDP growth appearing to be firmly in place, driven first by household consumption expenditure and then by infrastructural spend, the marginal propensity to import is increasing,” says Garrow. “Trade deficits in the final quarter of last year, as measured by the South African Revenue Service, suggest that the Bank’s trade reporting will reflect a similar trend of rising deficits,” says Standard Bank economist Shireen Darmalingam. She says that for last year, Standard Bank pencilled in a current account deficit as a percentage of GDP of around 4,2%. Economists remain confident SA will be able to adequately finance the deficit if it can keep attracting foreign direct investment. The figure for household debt as a percentage of disposable income will be watched by analysts. This stood at 63,5% in the third quarter, a new record high, driven by the favourable environment of low inflation, low interest rates and higher disposable incomes. Strong consumer demand has seen demand for credit, particularly to buy homes and cars, increase over the past few quarters. The Bank is keeping its eye on credit demand for any potential inflationary impact. Unit labour costs data, which could have implications for the inflation outlook, will be scrutinised, says Darmalingam. “Labour productivity and costs will largely be determined by movements in remuneration, growth and employment,” she says. The Bank’s third-quarter bulletin showed that nominal remuneration per worker increased 8% year-on-year in 2004. Darmalingam says moderate growth in unit labour costs should result in moderate growth in producer and consumer prices. “The bulletin is likely to confirm strong growth in GDP throughout the year, together with improving non-agricultural sector employment,” says Darmalingam. Analysts’ interest will be in the figure for gross saving as a percentage of GDP, particularly as the country gears itself for higher economic growth. In the third quarter, gross saving edged down to 13%, from 13,5% in the second quarter, far below the 20% rate the country needs to increase investment spending and accelerate economic growth. There has been more of an incentive for consumers to spend money. However, economists say initiatives introduced in this year’s budget, such as the halving of tax on retirement funds, will encourage a higher savings rate. Internationally, the focus will be on the Bank of England’s (BOE’s) minutes from this month’s monetary policy committee meeting as well as key inflation data. The minutes are expected to provide better insight into the BOE’s next rate move. Global central banks, such as the Bank of Japan and the European Central Bank, have signalled they may hike rates to keep inflation in check. This has seen funds rushing from emerging markets into these economies as investors seek better yields. This week is likely to be better for emerging markets, including SA, analysts say, as the sell off moderates and the dollar comes under pressure from better-than-expected inflation figures and a higher gold price.

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