Without any major disruption minus the current bout of load shedding, South African economic growth may well meet and quite possibly outstrip forecasts of between 2% and 2.5%. But there’s a caveat, as in all things South African.
Government needs to create an enabling environment, businesses need to start investing and creating jobs and workers need to boost productivity and avoid strike action at all costs.
Granted, some of SA’s economic growth is linked to what happens to global economic growth and demand, but a lot of how SA has performed economically over the past two years has been the doing of South Africans.
Then there are the forced power cuts or load shedding. Those that have not accepted this as a way of life should do so immediately and find an alternative while they’re at it.
Load shedding is a necessary evil. Rather a few hours of no electricity than a complete nationwide blackout. Imagine the consequences.
The South African Chamber of Commerce & Industry recently joined others in calling for an electricity summit.
Not that people gathering to talk solutions is a bad idea, but really, how much more talking can be done?
Businesses already know that solutions include investing in alternative sources of energy such as generators.
Other than that, there won’t be much to do until the Medupi power station is up and running and starts adding power to the grid. What is discouraging are the endless postponements of the deadline.
It is, however, welcome that power provider Eskom lets SA know when power cuts will occur and how long they will last, though some areas have experienced delays in reconnection.
Power outages will definitely constrain economic growth potential, though the extent is unclear.
Capital Economics economists say they do not think power outages in the fourth quarter of 2014 prevented the economy from expanding rapidly. “So another few months of disruptions would not be a disaster for the economy,” says Capital Economics assistant economist Jack Allen.
There could be some truth to this sentiment. A strike in a key economic sector is far more damaging.
The South African consumer has enjoyed some relief in disposable income. Interest rates have remained unchanged for some time, providing breathing space to those in debt to pay off existing debt. Figures show that a notable share of disposable income still goes towards servicing debt.
Inflation has also slowed since September last year, boosting disposable incomes.
Inflation eased from around 5,9% year on year in September to 5,3% year on year in December, with forecasts for further deceleration.
Lower inflation is the main reason behind the Reserve Bank’s decision to keep interest rates unchanged in January. The repo rate has been on hold at 5,75% since September last year.
Food prices have come off their highs, with the latest UN Food & Agriculture Organisation’s food price index continuing its decline in January amid strong production expectations.
It averaged 182,7 points for the month, or 1,9% below its December 2014 level. The index has been on a downward path since April 2014.
Fuel prices have also fallen sharply since August last year from R14,33 a litre to R10,31 in February.
The benefits of lower fuel prices are being felt by motorists but not those who use public transport. Public transport
Consumers still have to face upcoming steep electricity tariff hikes
operators are quick to hike fares when fuel prices rise strongly but hardly ever reduce them when fuel prices fall.
All the above factors will give the consumer some breathing space, though this does not mean it will be easy going.
Consumers still have to face upcoming steep electricity tariff hikes, as well as pay more for such things as medical bills and municipal levies.
Unlike last year when Eskom raised electricity tariffs by 8%, the increase this year will be 12,7%. The energy regulator allowed Eskom this tariff increase because of the financial woes the energy provider is facing.
The challenge with economic indicators is how fast they change. The benefits from lower oil prices appear to be dissipating as the cost of this commodity has risen slightly over the past few days.
The effect on domestic fuel prices is that the sharp drops in prices experienced in recent months could dissipate. This shows just how much consumers need to take advantage of lower prices while they still have them.
The rand continues to be unreliable given its volatility. Just when it appears it has settled within a firmer band, the next day something happens in the US and it weakens under severe pressure.
There are several factors that could boost the rand: a narrowing of the current account and budget deficits, certainty regarding power provision, and a quick resolution to public-sector wage talks.
Investec chief economist Annabel Bishop says in a rand outlook report that the trade-weighted rand is expected to strengthen this year and in the long term regain its purchasing power parity valuation against the US dollar.
Government’s fiscal consolidation looks set to continue, as explained by Finance Minister Nhlanhla Nene in the recent budget.
Still on fiscal consolidation, the finance minister, as the person responsible for the government purse, would do well to advise President Jacob Zuma and the entire ANC leadership to avoid creating more departments. The existing ones need to improve their delivery. The addition of the small business development ministry, for instance, after the May 7 general elections last year, was not necessary as these duties could have been carried out by the Trade and Industry Department.
Spending prudently will help bring down budget deficits over time, lead to a firmer rand and help SA avoid sovereign credit downgrades.
If the country manages its finances well enough, some agencies might even upgrade the ratings, which are dangerously close to junk status.
Investors are never too keen on investing in a country whose bonds are rated junk.
Global economic growth should provide some tailwinds to the local economy. World economic growth is expected to be higher this year than last year — which implies higher demand. SA is an open economy that benefits from selling to global markets.
The only uncertainty is where oil prices will end up. It is safe to assume that oil prices are unlikely to fall to levels of around $45 a barrel given that global demand should gain some momentum going into the second half of the year. Instead forecasts are for the oil price to recover to around $60 by year-end.
It can only be hoped that those responsible for buying the oil that SA uses have been using this opportunity to stock up on the commodity.
What is important for SA over the coming months is not just where oil prices go, but when the US Federal Reserve starts raising interest rates.
If higher rates in the US cause emerging-market currency weakness, including the rand, and this causes deterioration in the inflation outlook, chances are the Reserve Bank will raise rates in the final quarter of this year.
Higher interest rates are inevitable and must be done if SA is to compete successfully for thousands of investors around the world who are looking for higher returns on investments.
What is important for SA over the coming months is not just where oil prices go, but when the US Federal Reserve starts raising interest rates