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MoneyIn the current economic climate, ignorance may seem like bliss. But sticking our heads in the sand and waiting for the storm to pass is never going to help us make the right decisions in what is to be a harder year ahead than its grim predecessor. Our expert David Mayfield stared the beast in the eye.

The deterioration in economic conditions and the serious disruption in financial markets have shaken the benign trajectory of the global economy. The palpable violation has tripped the medium term prognosis of both mature and emerging market economies alike. And the great recession in our midst is likely to last longer than most realise. A clear shock to the confidence seems to have seeped unapologetically into the rhythm of key emerging markets. Within the gauzy mist, impregnated with fear, finding ones bearings is fraught with difficulty.

In the current global economic recession, downside growth risks have accumulated in South Africa. Already, economic growth is likely to post around 1% in 2009. Struggling households are at the core of this weakness, which is causing South African business to experience a marked deterioration in their outlook. Expect this reinforcing cycle to continue causing employment conditions to deteriorate.

Compounding the situation, house prices are declining and equity markets have been battered. Clearly, wealth is rescinding before our eyes. Trading updates from retailers point to waning household spending at the end of last year, despite petrol price and interest rate relief. Sales of new cars plummeted by a staggering 30% in the final quarter of last year, suggesting a cutback in demand for luxury items and, most importantly, household debt.

Even the usually prudent reserve bank, who cut rates by a further 1% in February, discussed a larger reduction in interest rates. In fact, many analysts are expecting a mid-meeting cut between now and April. Promisingly, the National Treasury has raised the potential floor somewhat by reinforcing the social security scaffold under the most insecure and vulnerable. In addition, the economy will receive an additional boost from government infrastructure spending.

By extension, growth in imports will be sustained as half of total imports are capital intensive. To be sure, the downdraft in commodity prices will benefit the oil import bill. Meanwhile, domestic demand erosion will inhibit advances in exports translating to a pressured trade deficit and contributing to a sizeable current account deficit of around 7%. By definition, this will place pressure on the rand.

Nonetheless, significant weakness in the tradable sectors has manifest in private projects being placed on the back burner due to aggressive cost rationalisation. Falling business confidence will continue to weigh on investment prospects this year, despite envisaged interest rate relief. In short, South Africa faces a perfect storm of a natural domestic cyclical decline in tandem with a more precipitous structural decline in the international economy.

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