Old Mutual looks back to 2005, forward to 2006.

At an Old Mutual presentation this week chief economist Rian le Roux spent some time reviewing 2005's economic performance before making a few predictions for next year.

Le Roux was happy to report that Old Mutual's 2005 expected scenario unfolded on cue. This time last year Old Mutual predicted that the domestic economy would perform well in a environment where there was a strong rand, solid growth and low inflation.

The rand has indeed remained relatively strong, trading in a range between R5.80 and R6.70 to the dollar and figures released by Stats SA yesterday showed that growth for the first nine months of this year was estimated at 5.1%. Furthermore, inflation had remained within targeted levels.

'There is a growing acknowledgement by both local and foreign investors that the current economic environment may not only be more sustainable than any upturn over the past 25 years but that growth may well settle between 4 and 5% for an extended period of time,' he said.

Not all domestic local news was good, however. Le Roux pointed to the growing current account deficit, now in the region of $10 billion. However he felt that a deficit account of between 1% and 4% of GDP was within acceptable parameters.

On interest rates he said that the Reserve Bank had made it very clear that it would respond decisively to any indication that the rise in energy costs.

Internationally, he said that the global recovery was firmly on track, and that the Chinese/ Emerging Market expansion remained on course, mostly due to the fact that increased commodity prices and low interest rates had favoured developing countries. (See table below). He predicted that the commodity price cycle may well be entering a 'super cycle', a period of structural and cyclical growth. caused higher relative growth in developing countries.

He said that Japan's recovery looked more durable as consumers had started spending, (it was no longer purely an export-led recovery) the Euro-area was showing signs of life and the US was growing roughly at trend.

However concerns remain that the huge global imbalances remain entrenched. 'Looking ahead to 2006, the risks to the global economy cannot be ignored,' he said. 'Apart from inflation, global trade imbalances, large budget deficits, elevated property prices and high household debt levels all hold significant risks to medium-term outlook of the world economy.'

The graphs below show that huge imbalances in the world economy remain firmly entrenched.

'Yet we continue to believe that the very existence of these problems will make global policy makers tread cautiously when they tighten monetary policy because they do not want to cause a global growth 'accident' that could unwind these imbalances in a destabilizing an growth depressing fashion.

'As a result, while we think that the world economy will probably grow at a slower pace next year than the past two years we still hold the view the world economy is unlikely to enter a sudden or sever recession in 2006. The recent softer oil price, if sustained will strengthen our case as it will the prospect of lower global interest rates and reduced economic growth rates.

Looking ahead, he said that Old Mutual expected global expansion to grow at a moderate pace, inflation to peak out during the first half of he year and global interest rates to rise gradually further at least during the opening months of the year.

'Such an environment should continue to be fairly South Africa-friendly,' he said.