Economic update and outlook

20 January 2011

Key issues for 2011

‰ Global economic outlook
‰ The consumer
‰ The infrastructural constraint
‰ The policy environment

1
20 January 2011

1
 Equity markets a bit more confident again?

Morgan Stanley Capital Index rebased to January 2003 = 100

500

450

400
World
350
Emerging Markets
300

250

200

150

100

50
03 04 05 06 07 08 09 10

2
20 January 2011

Similar picture in commodity markets

$ Indices
320
All commodities
280 Metals
Industrial
Food
240

200

160

120

80

40
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

3
20 January 2011

2
 Forecasts look much better – even normal

Countries and regions

Forecasts Forecasts Forecasts
October 2010 April 2010 October 2009
2005 2006 2007 2008 2009 2010 2011 2012 2010 2011 2012 2009 2010
World 4.6 5.2 5.3 2.8 -0.6 4.8 4.2 4.5 4.2 4.3 4.5 -1.1 3.1
Advanced economies 2.7 3.0 2.7 0.2 -3.2 2.7 2.2 2.6 2.3 2.4 2.4 -3.4 1.3
US 3.1 2.7 1.9 0.0 -2.6 2.6 2.3 3.0 3.1 2.6 2.4 -2.7 1.5
Japan 1.9 2.0 2.4 -1.2 -5.2 2.8 1.5 2.0 1.9 2.0 2.0 -5.4 1.7
Euro area 1.7 3.0 2.9 0.5 -4.1 1.7 1.5 1.8 1.0 1.5 1.8 -4.2 0.3
Germany 0.8 3.4 2.7 1.0 -4.7 3.3 2.0 2.0 1.2 1.7 2.0 -5.3 0.3
UK 2.2 2.8 2.7 -0.1 -4.9 1.7 2.0 2.3 1.3 2.5 2.9 -4.4 0.9
Emerging and developing 7.3 8.2 8.7 6.0 2.5 7.1 6.4 6.5 6.3 6.5 6.6 1.7 5.1
Developing Asia 9.5 10.4 11.4 7.7 6.9 9.4 8.4 8.4 8.7 8.7 8.6 6.2 7.3
China 11.3 12.7 14.2 9.6 9.1 10.5 9.6 9.5 10.0 9.9 9.8 8.5 9.0
India 9.2 9.7 9.9 6.4 5.7 9.7 8.4 8.0 8.8 8.4 8.0 5.4 6.4
Middle East and N Africa 5.3 5.8 6.0 5.0 2.0 4.1 5.1 4.8 4.5 4.8 4.8 2.0 4.2
Sub-Saharan Africa 6.3 6.4 7.0 5.5 2.6 5.0 5.5 5.7 4.7 5.9 5.5 1.3 4.1
South Africa 5.3 5.6 5.5 3.7 -1.8 3.0 3.5 3.9 2.6 3.6 4.0 -2.2 1.7
Angola 20.6 18.6 20.3 13.3 0.7 5.9 7.1 6.3 7.1 8.3 6.3 0.2 9.3
Nigeria 5.4 6.2 7.0 6.0 7.0 7.4 7.4 7.2 7.0 7.3 6.7 2.9 5.0
Zimbabwe n/a -3.7 -3.7 -18.9 5.7 5.9 4.5 4.5 2.2 0.0 1.0 3.7 6.0
Namibia 5.4 6.2 7.0 6.0 7.0 7.4 7.4 7.2 1.7 2.2 2.6 -0.7 1.7
Latin America 4.7 5.6 5.7 4.3 -1.7 5.7 4.0 4.2 4.0 4.0 4.3 -2.5 2.9
Brazil 3.2 4.0 6.1 5.1 -0.2 7.5 4.1 4.1 5.5 4.1 4.1 -0.7 3.5
Mexico 3.2 4.9 3.3 1.5 -6.5 5.0 3.9 5.0 4.2 4.5 5.2 -7.3 3.3
Central & Eastern Europe 5.9 6.5 5.5 3.0 -3.6 3.7 3.1 3.8 2.8 3.4 4.0 -5.0 1.8
Russia 6.4 8.2 8.5 5.2 -7.9 4.0 4.3 4.4 4.0 3.3 3.7 -7.5 1.5

4
20 January 2011

But developed economies still look subpar

GDP: Seasonally adjusted volume index: Q1 2007 =100

109

107

105

103

101
Euro area
99 France
Germany
97 Spain
UK
95 US
100 line
93 Italy
South Africa
91
07 08 09 10
Source: Eurostat

5
20 January 2011

3
In contrast, developing economies are generally strong

140 GDP SA index: Q1 2007=100

Argentina
135 Brazil
Chile
130 Korea
Hungary
125 Czech
RSA
120 100 line
Poland
China
115

110

105

100

95

90
07 08 09 10
Source: Datastream

6
20 January 2011

US and China have had a role reversal

Car sales: Actual units sold in millions

1.8

US China
1.6

1.4

1.2

1.0

0.8

0.6

0.4

0.2
05 06 07 08 09 10 11

7
20 January 2011

4
 US typifies and leads the recovery in developed world

Y-o-y % change Retail sales (incl cars and food services): natural log
15 12.9
13
12.8
11
9
12.7
7
5 12.6
3
12.5
1
-1
12.4
-3
-5 12.3
-7
12.2
-9
-11
Downturns Y-o-y % Retail sales 12.1
-13
-15 12
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Federal Reserve FRED

8
20 January 2011

Households still in trouble

Changes in non-farm payrolls Unemployment rate: %

1200 11

Downturns
1000
Changes in non-farm payrols 10

800
Unemployment rate
9
600

8
400

200 7

0
6

-200
5
-400

4
-600

-800 3
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Federal Reserve FRED

9
20 January 2011

5
Housing activity is still extremely depressed

Y-o-y % change US new house sales: '000s seasonally adjusted annual

100 1400

80 1200

60
1000

40
800
20
600
0

400
-20
Downturns
-40
Y-o-y % 200
new house sales
-60 0
65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Source: Federal Reserve FRED

10
20 January 2011

Chinese activity has remained strong

Y-o-y % China steel production (natural log)

h
50 11.0
10.8
40 Y-o-y %
10.6
Steel production
30 10.4
10.2
20 10.0
9.8
10
9.6
0 9.4
9.2
-10
9.0
-20 8.8
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Datastream

11
20 January 2011

6
Bolstered by strong credit and stimulatory policies

Billions of yuan Year-on-year % change

2000 40

New loans (Yuan bn) 35

1500
Total loans (Y-o-y%) 30

25
1000

20

500
15

10
0
5

-500 0
2004 2005 2006 2007 2008 2009 2010
Source: Datastream

12
20 January 2011

Problems in the system

‰ Cures are themselves dangerous – monetary and fiscal
expansion

13
20 January 2011

7
Global liquidity set to rise once again – it has been the source of
many evils over the 1990s and 2000s
International liquidity as % global gdp US Monetary base as % total
20 40
18
35
16
30
14
25
12

10 20
8 15
6
10
4 Liquidity as a % of gdp
5
2 % change in ratio

0 0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
14
20 January 2011

As the US Federal Reserve embarks on another round of

quantitative easing (QE2) … and the ECB joins them
Federal Reserve Bank credit - $ billions
2500

2000 Other
Mortgage backed securities
US Treasury and Federal securities
1500

1000

500

07 08 09 10
20 20 20 20

15
20 January 2011

8
 This won’t do much for lending

Y-o-y % change Total loans and leases at commercial banks: natural log
16
8.9

12
8.7

8
8.5

4
8.3

0
8.1

-4
7.9

Downturns
-8 Y-o-y % 7.7
Total loans and leases at commercial banks
-12 7.5
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Federal Reserve FRED

16
20 January 2011

But is causing problems in certain emerging markets

Real exchange rates: Index=100=January

150

140

130

120

110

100

90
SA Australia Brazil Turkey Russia
China 100 Euro US Malaysia
80
09 10

17
20 January 2011

9
 Governments have leveraged up – debt to gdp well above
60% ‘limit’ and rising – some now unsustainable
Japan
Greece
Italy
Belgium
Ireland
United States
Portugal
France
United Kingdom
Hungary
2012 (forecast)
Germany
2007
Spain
India
Brazil
Poland
Malaysia
Turkey
South Africa
Australia
China

0 50 100 150 200 250

18
20 January 2011

Problems in the system

‰ Cures are themselves dangerous – monetary and fiscal
expansion
– Strong liquidity pushing asset prices higher but not changing
fundamentals
– Strong liquidity is leading to further imbalances in emerging
world, overvalued exchange rates and rapid credit growth
– Fiscal overhang will take years to address

19
20 January 2011

10
Problems in the system
‰ Cures are themselves dangerous – monetary and fiscal
expansion

‰ Banks and credit markets still impaired

– Basel III and other regulations will keep banks very cautious
over the next few years

20
20 January 2011

Global climate

‰ Developed world still uncomfortable

– Credit-impaired with tighter regulations to come
– Monetary stimulus not working – reliance on QE
– Fiscal consolidation rather than countercyclical policies
– Confidence weak with no job growth

21
20 January 2011

11
 Global climate

‰ Developed world still uncomfortable

– Credit-impaired with tighter regulations to come
– Monetary stimulus not working – reliance on QE
– Fiscal consolidation rather than countercyclical policies
– Confidence weak with no job growth
‰ Developing world better placed
– No fiscal overhang
– Banking systems in a better position, better demographics
BUT
– QE and inflexible exchange rates presenting currency
problems as well as asset and credit bubbles
– Danger of instability over the medium term

22
20 January 2011

Locally, the economy has lost some momentum

Gdp: Q-o-q % change (saar)

10

-2

-4

-6

-8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

23
20 January 2011

12
 Third quarter performance was mixed

Index 2004=100
140
Agriculture Mining Manufacturing
Electricity and water Construction Domestic trade
130 Transport, comms Finance, real estate General government

120

110

100

90

80
07 08 09 10

24
20 January 2011

But more recent statistics are a bit more encouraging

Y-o-y % change Index

25 120

20 Y-o-y % change Index

110
15

10
100
5

0 90

-5
80
-10

-15
70
-20

-25 60
99 00 01 02 03 04 05 06 07 08 09 10

25
20 January 2011

13
 Certain sectors have recovered well

Manufacturing production: selected quarterly indices 2000=100

160
Total

150 Clothing & textiles

Food & beverages

140 Motor vehicles etc

Iron & steel etc

130 Petroleum and chemicals etc

Electrical Machinery

120

110

100

90

80

70
00 01 02 03 04 05 06 07 08 09 10
26
20 January 2011

Motor vehicles have been helped by strong recovery exports

Units exported As % of total

30,000 45

40
25,000
Units exported 35
As % ot total
20,000 30

25
15,000
20

10,000 15

10
5,000
5

0 0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

27
20 January 2011

14
 With this exception, the firm rand has hurt most exports

Log of index % from adjusted "fair" value

4.5 30

20

4.3
10

0
4.1
-10

-20
3.9 Deviation from neutral
Effective rand -30
PPP calculation adjusted
3.7 -40
00 01 02 03 04 05 06 07 08 09 10
28
20 January 2011

With strong inflows into SA securities the main cause of rand

strength
Accumulative net foreign purchases of securities since 2004: R billion
280

240

200

160

120
Equities Gilts
80

40

-40
04 05 06 07 08 09 10 11

29
20 January 2011

15
 Outlook will be influenced by many global and local factors

Log of index % from adjusted "fair" value

4.5 30

20

4.3
10

0
4.1
-10

-20
3.9 Deviation from neutral
Effective rand -30
PPP calculation adjusted
3.7 -40
00 01 02 03 04 05 06 07 08 09 10
30
20 January 2011

Retail sales lost some momentum after 2010 World Cup

Y-o-y% R billions (seasonally adjusted)

16 45
14
12
10 40
8
6
4 35
2
0
-2 30
-4
-6 Year-on-year % change Seasonally adjusted Trend
-8 25
02 03 04 05 06 07 08 09 10
Source: StatsSA

31
20 January 2011

16
 Car sales have bounced off a very low base

Y-o-y % change Units sold

60

50 37000

40
33000
30

20
29000
10

0 25000

-10
21000
-20

-30
17000
Y-o-y % change
-40
Car sales (three months mov avg)
-50 13000
98 99 00 01 02 03 04 05 06 07 08 09 10 11

32
20 January 2011

Unemployment has been a major constraint on consumers

Employed ('000s) Unemployment %

14000 26
Total employment (lhs) Unemployment rate (rhs)
13800
25
13600
24
13400

13200 23

13000
22
12800
21
12600

12400 20
2008 2009 2010
33
20 January 2011

17
 Job losses across the board

Employment changes (%) since 'Q4 2008 peak

-7 -5 -3 -1 1 3 5 7

Community services

Utilities

Transport

Finance

Mining

Construction

Agriculture
% loss or gain - lower scale
Private households
% contribution to total loss
Domestic trade
- upper scale
Manufacturing

Total

-17 -12 -7 -2 3 8 13

34
20 January 2011

Debt has stayed high but interest service costs have come off

Personal debt as a % of disposable income Interest service costs as % PDI

90 16

80 14
70
12
60
10
50
8
40
6
30
4
20 Debt to income ratio

10 Interest service costs 2

0 0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
35
20 January 2011

18
 Credit extension is struggling to get off the ground

Credit yoy% Prime %

40 25
36
32
20
28
24
20 15

16
12 10
8
4
5
0
-4 Downturns Business Households Prime

-8 0
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

36
20 January 2011

The interest rate outlook is relatively benign

CPI, Prime (%) Real prime (%)

26 20
24 Forecast 18
22 real pod
prime 16
20 CPI
18 14
16 12
14
10
12
10 8
8 6
6
4
4
2 2
0 0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
37
20 January 2011

19
 The policy environment: the New Growth Path
‰ Aims
– Emphasis on jobs: 5 million jobs by 2020
– Unemployment from 25% to 15%
‰ Methods
– Macroeconomic stability – fiscal, monetary and exchange rate
– Microeconomic reform – competition policy, industrial policy (IPAP2),
wage policy?
‰ Problems
– Overriding message is that state has to deliver, choose and allocate
– Not enough emphasis on fixing the simple things that are broken –
regulatory reform, infrastructure, ensuring teachers teach etc
– No mechanism for lost generation – wage subsidy idea absent
– In some important respects goes against best practice – eg the Growth
Commission (promote openness, macroeconomic stability, future
orientation through savings, education and infrastructure, competent
and enabling government, market allocation)
38
20 January 2011

Some conclusions
‰ Recovery is underway
‰ However, cycle less well based and medium term more
constrained
– Global environment won’t be as conducive (although depends
on how SA adjusts); potential for drama still very high
– Consumer will be hampered by high debt starting point and
limited employment growth – however, will see improvements
next year
– Credit will also be impeded by changes in regulations
although SA banks are relatively healthy
– Physical infrastructure constraints and policy uncertainty
hampering recovery as well

39
20 January 2011

20
Growth will remain positive but medium-term prospects more
modest

Gdp: Q-o-q % change (saar)

8

-2

-4
Forecast
History
-6

-8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

40
20 January 2011

DENNIS DYKES
CHIEF ECONOMIST, NEDBANK GROUP
Economic Outlook

Dennis is the Nedbank Group's Chief Economist. He joined the Group in

December 1983 and was appointed Chief Economist in May 1994. Dennis
serves on a number of organised business committees, inter alia as a
director of SACCI (formerly SACOB), the Chairman of Business Unity
South Africa’s Standing Committee on Economic Policy and as a business
representative on the Nedlac Public Finance and Monetary Policy
Chamber. Dennis is the author of many articles for in-house and external
publications, and is a previous winner of the Reuters Economist of the
Year award.

His qualifications include an honours degree from Bath University and a

master's degree in economics from the London School of Economics.

41
20 January 2011

21