The SA economic outlook will be tough over the next 18 months, but the foundations for a future recovery are in the process of being laid, according to chief economist from RMB, Rudolf Gouws. He adds that another Great Depression is not on the cards.

He was speaking at a PwC briefing in Johannesburg on Friday to a large and predominantly accountant audience on the current financial crisis.

Gouws highlights that South Africa is facing two shocks – a terms of trade [the volume of exports that can be traded for a given volume of imports] shock and a de-leverage shock, in which highly leveraged positions are reversed.

Credit extension

He pointed out that the total credit being extended in SA is now in a cyclical decline as conditions get tighter.

Gouws also feels that the declining commodity prices are weighing on the rand as the country is a commodity exporter.

He feels there is little chance of an early commodity recovery and the rand is reflecting the reality of the worst current account deficit among emerging markets. This entails strong dividend and interest outflows.

Gouws says while conditions will be "terrible", he does not foresee a Great Depression like that seen in the 1930s lasting for seven years. He notes that the current crisis is different due to the various stimulus packages and other actions taken.

In SA, he also points to the fact that the banking system has been less volatile than elsewhere in the world.

"Shock absorbers"

He notes too that South Africa does have various "shock absorbers" to limit the damage of the shocks.

These shock absorbers are a flexible currency, contra-cyclical government fundamentals, lower interest rates to come and the infrastructure spending drive continuing in the face of the crisis.

"A dramatic fall in inflation is expected, starting with the data this month. Then it should come down rapidly," he says.

Gouws says this, together with slower economic growth, will set the tone for rate cuts.

"It might happen in December, but I don't think so, but cuts should take place from early next year," said Gouws. He sees them turning down gradually, rather than in dramatic fashion.

Gouws says that the negative output gap – where the economy starts to operate below capacity – will be another dis-inflationary force to factor in going forward.

I-Net Bridge