Cees Bruggemans: Consulting Economist Bruggemans & Associates
Cees Bruggemans: Consulting Economist Bruggemans & Associates

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The SA Margin Call


That was an awful lot of ado about precisely nothing.

The ANC lost perhaps 2% of its votes on the margin, some 500 000 voters at most, a few of whom may have switched to the DA but the majority of which probably ended up with the EFF.

Agang missing in action, Cope decimated, and a few more such deck chairs marginally rearranged.
Given all the media noise of recent years, one would have expected more. Instead, party loyalty counted for far more, as the more astute observers had been quietly saying all along.

Will this outcome inspire better leadership, more policy pro-activity, or more sloth? Certainly more infighting as the worker drones take wing. So what?

It surrenders the economy mostly to its own devices, and any gifts the world may grant us, as it has been for so long now.

At least macro policy remains in good hands, with stability maintained. What's missing are the structural policies, especially labour relations reforms, and better educational results, that could underpin a stronger state and give us more dynamic infrastructure efforts.

As things stand, car sales are in cyclical decline, mining output is strike-bound and hamstrung, manufacturing is skirting on the edge of recession (March output excluding fire-distorted steel actually declined slightly year-on-year), formal private employment is shrinking, monthly total household income (including bonuses and overtime) is rising much slower (4%) than inflation (6%) and household credit is stagnating (and debt ratios falling). None of that is good for retail.

With Fed chair Yellen looking very determined but sounding and acting very dovish, US interest rates promise to be low for long into 2015 and thereafter rise only very stealthily, indeed so much so that asset markets keep taking heart, risk assets remain in vogue, wealth effects positive and the Rand keeps clawing back lost ground (now testing 10.35:$).

None of that looks life-threatening, and SARB would not surprise us in the least by keeping interest rates unchanged this month (and in July) as any inflation threat looks contained and the politics stable, with the economy sick (and still sickening?), warranting rate cuts instead and/or a weaker supportive Rand.

SARB is unlikely to bend this far over backwards, but one can see the risks being far less asymmetrical than painted only so very recently in March.

The ECB also did precisely nothing today, leaving rates unchanged, but Draghi talking up another storm that they will be ready to act unconventionally (within their mandate) if the need were to rise (whenever).

It was enough for markets to celebrate an easing bias without the easing, both bond yields and Euro easing.

Crucially, Draghi identified geopolitical risks as the thing to watch.

With NATO and others claiming Russia is not sticking with its agreements, and a quite different (19th century) worldview prevailing over there (possibly already for many years, but cleverly hidden from view), there are indeed risks for Europe in its eastern borderlands which in its current frail state it might not easily withstand, possibly succumbing to the point of unacceptable growth and inflation prospects confronting politicians and forcing the ECB hand, as they did similarly Bernanke in a different context in 2008 and thereafter.

There may therefore still lie many surprises ahead this year (and next), also confronting the SARB which by its very nature remains a very cautious entity, and rightly so.

It looks like no interest rate hikes for us, too, until we are a lot closer to the American action, possibly well into next year, and then still only very timidly which undoubtedly would suit us, were this to eventuate.
Meanwhile risky asset markets should continue to do reasonably well. The JSE whispers it daily.
Cees Bruggemans
Consulting Economist
Bruggemans & Associates
Website   www.bruggemans.co.za
Email  economics@bruggemans.co.za
Twitter   @ceesbruggemans

The SA Margin Call

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