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Reading between the lines: Local economic update - June 2012

Published

2012

Thu

14

Jun

By Tendani Mantshimuli, consumer economist, Liberty Life

 

The Reserve Bank left interest rates unchanged but its statement provides a clear view on the South African economy.

 

The South African Reserve Bank (SARB)'s Monetary Policy Committee (MPC) left interest rates unchanged with the repo rate at 5.5% and the prime overdraft rate at 9.9% during its meeting in May. 

 

The decision was taken against a backdrop of a deepening economic crisis in Europe. Since Europe is an important trading partner for South Africa, developments there impact on South Africa. For consumers the unchanged interest rates means that the cost of servicing debt is still the lowest it's been for a while, yet debt levels remained stubbornly high at around 75% (household debt at a percentage of household disposable income) during the last quarter of 2011.

 

SARB on inflation

Inflation is forecast to revert to within the target by the third quarter of this year. CPI[1] for April 2012 came in slightly below market consensus at 6.1% compared to 6.0% in March. 

 

On a month-to-month basis inflation only increased 0.4% compared to a 1.1% increase for March.  Not surprisingly, the biggest increase in April was the transport sector which incorporated the large (71 cents per litre) increase in petrol prices.

 

The higher energy prices do not appear to have fed through to second round effects[2] although core inflation (excluding petrol and energy prices) has ticked up to 4.5%.   According to the SARB, the forecast for core inflation continues to show a moderate upward trend in the short to medium term.

 

Core inflation is expected to peak at an average of 5.5% in the second quarter of 2013, marginally higher than the previous forecast, before moderating, and averaging 4.5%in the final quarter of 2014. No doubt the SARB will continue to watch this closely.  Food inflation remained unchanged since March, although this might be impacted in the months to come by an uptick in global food prices as well as Rand weakness.

 

SARB on growth

The Bank’s central forecast for GDP[3] growth is more or less unchanged since the previous meeting of the MPC. The bank expects economic growth of 2.9% for 2012, 3.9% for 2013 and 4.1% in 2014.

 
There is no doubt that the gloomy prospects of the global economy have had some effect on South Africa's growth for the first quarter of this year. Growth in real GDP moderated from 3.2% in Q4 2011 to 2.7% during Q1 2012. Although growth slowed it was better than the consensus forecast.

 

Economic growth: the drivers and brakes

The slowdown in economic growth was due to a massive decline in mining production.  Surprisingly manufacturing output did very well contributing 1.2 % to this quarter’s growth; this despite the monthly indicators suggesting a weakening in the manufacturing sector.  Unfortunately this is one sector that is more likely to be impacted by adverse economic developments in Europe as it is export reliant. 

 

Therefore it is the domestic demand, as indicated by sustained increases in retail trade output, which has supported the manufacturing sector. This indicates that the South African consumer continues to be resilient.

 

Consumer spending during the first quarter was supported by an increase in salaries and wages but also by a strong increase in unsecured lending.  Unsecured lending is credit that a person is able to obtain from a financial institution without being required to provide collateral.

 

If the lending takes place in a disciplined fashion there is no cause for concern. It will be a concern if consumers are overextending themselves in an environment where debt levels are still quite high. While interest rates may be at their lowest for decades, the consumer should be cautious about incurring more debt because interest rates are likely to increase in 2013.

 

The mining sector came under pressure partly due to some work stoppages and the impact of lower commodity prices. The mining sector is one of the most labour intensive in this economy, providing employment to over 300 000 according to the latest Quarterly Labour Force Survey. Continued poor performance by this sector does not bode well for employment prospects.  To sustain consumption expenditure, that supports overall growth, we need to see a meaningful increase in employment.

 

References:

 

[1] Consumer price index is calculated by the monthly change in price of a set basket of goods.

[2] Second round effects occur when the primary price increase leads to price increases in other goods.

[3]Gross Domestic Product: the total market value of all final goods and services produced in a country in a given year.

 
Source: Fleishman-Hillard | Digital. Integrated. Global.
 
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