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Much of the domestic economic recovery that has occurred is a result of government spending

Mixed domestic economic signals over the past few months and into August, combined with continuing global uncertainty and the current wave of strikes, continue to cast doubts on the prospects of a sustained economic recovery in South Africa.

"The risks to Europe and the common currency remain substantial and the prospect for a recovery in the US is not certain.  While the outlook for emerging markets is favourable compared to those of developed markets, the impact of the uncertain global environment and the widespread strikes at home provide convincing reasons for caution when considering the prospects for the SA economy," says Daryll Owen (Pictured right), Chief Investment Officer at BoE Private Clients. 

He notes that the JSE All Share Index declined by 3.58% on a total return basis in August 2010.  The All Bond Index gained 3.0%, the Inflation-Linked Bond Index gained 4.0% and Cash returned 0.6%.  

While the JSE had positive net foreign inflows into equities of R799m for August, bringing the year to date total to R22.2bn, on a YTD basis the local equity index records a zero increase.

Additional data shows that the July year-on-year inflation rate measured a surprisingly low 3.7% and that GDP growth in the second quarter at 3,2% quarter on quarter was weaker than markets had expected. 

While private sector credit extension in July recorded a better than expected positive growth of 2.0%, corporate credit demand again dragged down the headline figure.

"The PMI (Purchasing Manager's Index) rose to above 50.3 in August, indicating expanding output. Encouragingly, the rise from June's 49.5 was partly due to the increase in the forward-looking component 'new sales orders', to 52.0.

However, the employment subcomponent, although rising for the second month, continued to signal contraction," says Owen.

Looking at the global economy, Owen notes that year-to-date the MSCI World equity index has lost 5.8% of its value.  US based indices have generally outperformed European equity markets, while emerging markets, by comparison, are looking much healthier. 

"The outlook for Europe, and specifically euro-based economies, remains worrying. The challenges to growth faced by especially Spain, Portugal, Ireland and Greece are considerable.  Household balance sheets were badly affected by the crisis and the collapse in asset values."

"The desire to save and restore wealth will continue to weigh on these economies' banking sectors, the firms that supply reluctant consumers with goods and services, and government revenues.

"The resultant combination of businesses cutting capacity and government austerity measures will undermine the economies' ability to grow.  The market is worried about the ability of these countries to repay their debts and is requiring higher interest rates to compensate for the increased risk of default.   Uncertainty in these European markets will undoubtedly impact on the SA domestic economy too," he says.

Mike Schüssler (Pictured right), economist at Economists.co.za, who is responsible for compiling the Sake24 and BoE Private Clients provincial barometers, maintains that much of the domestic economic recovery that has occurred is a result of government spending, which has grown by double digits in the four provinces where economic activity is measured.

"In the Eastern Cape, where government spending through local and provincial government contributes 24% to the provincial economy, spending in July was 18% higher than in July 2009. In June the growth was 8%." 

"Similarly, government spending in July in Gauteng (18.6%), Free State (17%) and Western Cape (10.8%) was also much higher than in July last year.

"This is not sustainable: government cannot and shouldn't want to increase spending by these rates. If this becomes a trend, government debt will become a problem again", he concludes.