South Africans should get used to the R-word as more gloom is undoubtedly in store for the local economy.

If you believed the earlier hype that SA would escape the global recession because of its "stable" banking sector, you've been bamboozled.

Mounting woes

This is in line with recent sentiments expressed by Brian Coulton, managing director of Fitch Ratings and the agency's head of Europe, the Middle East and Africa, who said given the size of its current account deficit, excluding net foreign direct investment, SA would have to undergo a significant economic adjustment.

"Gross domestic product growth of one to two percent next year would be a good outcome, which would lead to deterioration in fiscal performance and could test support for the macroeconomic policy framework," he said.

Du Plessis said the SA economy appeared particularly vulnerable. "This is evident in the historical relationship between SA's real GDP growth and the global services Purchasing Managers' Index, used as a proxy for world economic growth."

He added that the slowdown retail sales looked set to pull GDP growth down further, especially when one considered the two-quarter lag for GDP growth.

Joining the R brigade

He said the SA Reserve Bank might try to defend the rand a bit longer but a cut in interest rates was an inevitable.

Du Plessis said the global credit crisis had thrust SA's dependency on global capital flows on centre stage, especially as the country's risk rating had been downgraded by the world's major credit rating agencies.

"The current account deficit has so far been financed by foreign portfolio flows. These are notoriously fickle and this year we have already seen net outflows of R53-billion and R400-million from equity and bond investments, respectively. A turnaround in this situation should not be expected before the global credit situation calms down and investors develop a renewed appetite for risk."

Shaun le Roux of Alphen Asset Management said available economic data had been pointing to a recession in the G7 countries for some time.

He said for the Southern Africa region, mining and infrastructure development had been the two pillars of strength. But it was doubtful that these sectors would hold up in the context of the recent collapse in commodity prices and the dramatic global slowdown.

"Recent share price performance in the domestic construction sector would imply that the market is taking quite a dim view on the future prospects for profitability in both these areas," he said.

"The dramatic fall in commodity prices started with a slump in demand from the West, but owed much of its magnitude to worries over current and future demand out of China," said Le Roux.

Breakneck growth rates

"Accordingly, we expect wholesale cancellation of planned mining projects where capital expenditure is not too far down the track, particularly with funding for new projects becoming so scarce."

He said commodity price levels would result in the freezing of many greenfields projects and new spending on exploration and drilling. Barring the large-scale, higher margin projects, there was just no money to be made. The likes of Xstrata, Lonmin, Rio and Vale had already announced production cuts.

But Le Roux said the medium-term outlook for infrastructure spending in Southern Africa was much healthier. "The region needs to play catch-up for the decades of underinvestment in infrastructure. Substantial new investment is required in fixed capital to provide a base for future economic expansion," he said.

For consumers, a recession would mean massive job losses, and those with employment would be cutting out the luxuries such as overseas travel.

Business Times