The FTs piece Wednesday on South Africa’s inequality risks highlighted “the contrast between expectations and reality” that underpins a “growing discontent among [the country’s] unemployed youth” (youth unemployment currently runs at roughly 50 percent, an estimated 2.m between age 18-25).  The same themes–though admittedly cultivated from a far different context in South Africa given apartheid–of income inequality and corporate cronyism are in fact being emphasized and examined across the world (in South Africa, substitute mining for finance and Julius Malema’s nationalization movement is not too far removed in ideology from that of OWS) in a “political black swan” moment of sorts that Nassim Taleb astutely warns may deteriorate into a broader and more meaningful class struggle.  The dilemma is magnified in a country like South Africa, however, if for no other reason than mining’s output fuels an appreciating terms of trade which, at least in theory, should help attack unemployment and drive domestic wage inflation across all sectors.  Yet said reality remains elusive, and the deficiency lies largely in persisting supply side gaps (momentum growth remained negative in September in both the mining and manufacturing sectors) that act as a headwind on growth (beyondbrics noted that “economists have revised down their GDP forecasts for 2011 from around 3.5 percent growth to 3 percent or lower and predict 2012 is likely to be tougher”) while both headline CPI (up to 5.7 percent in September from 5.3 percent the previous month) and real retail sales growth (up to 7.1% y/y in August from an upwardly revised 3.0% in July and above Bloomberg consensus estimates of 5.2% y/y) remain sticky.  This stagnating divergence is a central banker’s worst nightmare, and indeed the Reserve Bank’s rates (5.5 percent) are at a 30-year low, unchanged throughout the year since 650bp of slack between 2008-2010.  That said per SARB Deputy Governor Daniel Mminele “there is no evidence thus far to suggest that [inflation] pressures are becoming entrenched”; indeed, while most analysts don’t foresee any sort of monetary policy normalization until late 2012 at the earliest, we see room for further cuts as early as this winter.  Our continued recommendation of being long duration and short ZAR is thus a testament not only to the aforementioned supply barriers, but also to the probability that in such an environment discretionary spending will ultimately need a catalyst sooner rather than later (to wit, consumer confidence fell sharply in Q3).

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