After globally absorbing damaging hits this past year, fundamental repair is proceeding robustly. There is rapid clearing of debris as the world economy resiliently repositions for longer term revival.

Why such optimism in the midst of so much gloom?

After all, the US banking crisis is engulfing rich world financial systems. Commodity inflation is engulfing emerging countries.

Surely this is stuff of the-end-is-neigh-therefore-repent variety?

Well, yes and no. When buildings are crashing down all around you, the physical noise can be tremendously intimidating. But if these are now mostly controlled implosions clearing select city blocks rather than the initial hits doing the original damage, interpretation emphasis should also shift.

We should shift focus onto the renewal taking shape rather than sticking with the mayhem of past crises or the noise accompanying the clearing of resulting debris.

Perhaps not easy, with pieces of reinforced concrete still raining down from the sky, but nonetheless central to understanding the drift of things in their larger context.

Policy in the US today is intend on limiting banking damage and growth sacrifice as its financial system skirts collapse and its economy tries to sidestep recession.

In contrast, European and Japanese policy remains much more slow motion, addresses weaknesses where necessary, but generally not overreacting.

Policy in the emerging world has also turned decidedly proactive, with two-thirds of its largest central banks in anti-inflation tightening mode.

On display is the incurred damage, specifically rich world banking losses and rising commodity-induced inflation elsewhere, but also the resolve of policymakers everywhere to address the damage and undertake repair.

Once successfully completed, it suggests a shift back to growth revival, probably commencing later this year in the US, but taking up to another year to get fully underway elsewhere in the world.

A swallow doesn't make a summer, but a few of them is persuasive evidence that something is changing.

The Fed's decisive intervention at Bear Stearns in mid-March was the crucial institutional signal that market fundamentalist advice was going to be ignored. Financial markets wouldn't be left to their own devices to clear things up. This broke fear psychosis of imminent financial collapse.

US exports have been booming this past year due to the weakened Dollar and global resilience, which will remain an important support for the US economy in 2008-2010.

April non-farm payrolls in the US fell by only 20 000 and the US unemployment rate actually eased to 5.0 percent.

None of this is meant to imply that all financial losses and all shock value has by now surfaced, or that US unemployment won't still climb steadily this year, with another year of labour shedding ahead.

The financial debris is only half cleared, and US sector repositioning (especially in construction, banking, manufacturing) isn't over yet, probably taking another year or longer to be fully absorbed.

But credit markets should revive, as reflected in narrowing spreads and returning risk appetite. Other US sectors continue to add employment, especially business services and health, limiting the overall US contraction.

Though future data revisions could potentially still considerably reconfigure for the worse the 1Q2008 GDP growth of 0.6 percent and April's mild non-farm payroll slide, the drift of things suggests the nature of the current adjustment to be less severe than expected.

Many reasons are already being emphasized. The US labour buildup since 2003 remained leaner than in previous recoveries, with less hoarding of skills. That implies less of an unwinding in downturns, too.

Then also the Fed never pushed US rates into genuinely punishing territory during 2005-2006, preventing deep damage directly to the US economy, with housing and credit becoming the main triggers to a slowdown. And the Fed hasn't been slow to turn aggressive in cutting rates to prevent too much of a macro falloff.

None of this is to suggest that US households won't feel pain in coming quarters. They will as their real incomes suffer. But the adjustment at previous cyclical turns was a lot worse than what is so far being experienced (for example double the monthly job losses on a smaller workforce than seen so far in 2008).

Then we must allow for the $150bn fiscal boost getting to US households and businesses in coming months. Though much of it will be saved, and whatever is spent probably borrowing from 2009 activity, there will nevertheless be GDP support during 2H2008.

We are back to asking "What recession?"

Indeed, we are back to asking "What recession?" even as Warren Buffett warns it will be deeper and longer than now foreseen and George Soros remains ready for a much bigger financial system dislocation.

These are pretty distinct futures. Either it is going to get a lot worse, financially and macro-economically. Or we are already bottoming, if with a long playout, but with the focus on revival, not doom.

The US growth adjustment may well remain a limited one, with the extent of further Fed rate-cutting also now probably remaining limited.

In contrast, European growth is still easing as US weakness and banking trouble belatedly spill over, making the ECB less hawkish.

This outcome suggests a cyclical dollar bottom and euro peak already starting to form. Ahead is partial dollar recovery. If $1.60:euro was the watershed, the dollar may in 2009 be back in 1.40-1.50:euro territory.

This should remove dollar premiums from commodity prospects. However, growth prospects are expected to remain strong in commodity absorbing countries, and global growth prospects should eventually revive. That should underwrite a continuing strong commodity outlook, if with short-term hiccups.

Prevention of a truly disturbing financial crisis will probably prevent a precious metal breakout as envisaged earlier, while currently receding risk premiums suggest a less buoyant precious metal outlook. Instead of being able to rely on demand to boost precious metal prices, we need to understand supply conditions better to trace out likely prices movements critical to South Africa.

Though the global growth composition is rotating, there is unlikely to be less liquidity. Also, institutionally the cash buildup globally is impressive. With risk appetite reviving, so-called high risk emerging markets will probably find themselves positively re-rated.

This is before allowing that two-thirds of key emerging markets are in tightening monetary policy mode, pushing up interest rates to address the second-round effects of imported commodity inflation on their wage and price formation. Though this will erode their growth prospects, it is also re-rating their currencies stronger, even against a potentially recovering dollar.

The global central banks seem united in their belief that eventually the commodity inflation shock will crest and recede. This doesn't necessarily imply a demand and commodity price collapse. The global growth outlook will probably remain too robust for that. But the rate of change in commodity prices may not remain as virulent as in the past two years, implying slowing inflation ahead, reinforced by appreciating currencies, with policy efforts aiming to contain second-round effects.

The fallout from these tendencies is and will be shaping our economic performance fundamentally these next 18 months. Currently we are still throttling back the economy. Growth will then bottom. At some point our next cyclical revival will commence.

The rand reached 8.20:$ earlier this year, is currently approaching 7.50:$ and could be range-trading 6.75-7.75:$ over the coming year. The rand could see even more of an improvement on trade-weighted.

From cyclical trough to peak to trough, interest rates may have been hiked by six percent between mid-2006 and late 2008, prime potentially reaching as high as 16 percent by 2H2008, after which a three percent decline is likely next year, prime ending 2009 at 13 percent (compared to being 15 percent today).

Non-agricultural GDP growth will likely recede from 5.5 percent last year to half that pace (below three percent) this year, back to above three percent next year and four percent in 2010.

CPIX inflation will probably peak in 12-13 percent territory, if Eskom is granted its 60 percent tariff request or less drastically at 10-11 percent if Eskom tariff increases are more phased. CPIX should average above 10 percent this year, seven to eight percent next year, dipping towards five to six percent in 2010.

Wage inflation averaged 6.5 percent in 2006, 7.5 percent in 2007 and will probably average nine to 10 percent in 2008, before doing 8.5 percent in 2009 and 7.5 percent in 2010.

Sectors likely to experience deeper recession this year are passenger cars, house building, secondary property market, furniture and household appliances and manufacturing generally as inventory levels in most distribution channels are pared. Output growth and income formation is likely to be slower across most sectors of the economy, except agriculture and infrastructure related-construction.

Most households should experience reduced income growth, and business profit growth should be less exuberant. It is a surefire formula for a further fall in business and consumer confidence levels in every conceivable dimension this year.

Net formal employment gains these next twelve months should be minimal, if not negative. Credit growth should ease towards 12 to 15 percent over the coming twelve months.

It isn't clear when GDP growth will hit bottom. It may well be in early 2009.

By the time of the 2010 world soccer cup, however, the economy should again be growing at full potential, by then recognized as not much better than about 4 percent.

The growth revival by then is likely to be supported by ongoing infrastructure investment and net exports and should become boosted by falling nominal interest rates, accelerating anew the replacement cycles of most durable goods, especially cars and home-related products.

Cees Bruggemans is FNB's chief economist.


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