LOOK­ING AT GROWTH OF 2% AND RIS­ING COSTS

Financial Mail - Investors Monthly - - Opening Bell - with Nt­sak­isi Maswan­ganyi

Avoid­ing a strike in the public ser­vice would go a long way to help SA achieve that 2% eco­nomic growth fore­cast

The first half of 2014 has been all about cer­tainty, at least from an in­ter­est-rate point of view.

It was easy for con­sumers, cer­tainly those who wanted to take on short-term debt, to plan ahead and ad­e­quately struc­ture the re­pay­ment of their loans.

Un­for­tu­nately the sec­ond half of the year will come with some chal­lenges re­gard­ing un­cer­tainty of the tim­ing of the next rate in­crease in SA.

Some econ­o­mists fore­cast that the Re­serve Bank will hike in­ter­est rates in the fourth quar­ter of 2015 af­ter keep­ing them on hold since July 2014. Rates rose a cu­mu­la­tive 75 ba­sis points last year amid a high in­fla­tion out­look at the time.

Most of what hap­pens to in­ter­est rates lo­cally will de­pend on two main things: what hap­pens to the rand when the US Fed­eral Re­serve starts rais­ing rates and what in­fla­tion will do.

The Re­serve Bank has con­stantly warned that it will not raise rates sim­ply be­cause the US will have in­creased its own rates, but that it will mon­i­tor how the rand reacts to such a move and what the im­pli­ca­tions for in­fla­tion will be.

There is still un­cer­tainty as to the tim­ing of the in­ter­est rate in­crease in the US, though most an­a­lysts are pro­ject­ing Septem­ber or De­cem­ber.

If the in­ter­est-rate in­crease in the US leads to a sig­nif­i­cant and sus­tained rand de­pre­ci­a­tion, which in turn brings a de­te­ri­o­ra­tion of the in­fla­tion out­look, then the Re­serve Bank will have to lift rates.

The Re­serve Bank in March ex­pected in­fla­tion to re­main within the 3%-6% tar­get range for the whole of 2015 and tem­po­rar­ily breach this band in the first quar­ter of 2016 at 6,7% due to strong base ef­fects.

In­fla­tion slowed to 3,9% year on year in Fe­bru­ary from 4,4% in Jan­uary. The 3,9% is ex­pected to have been the low­est, with fore­casts for a mod­er­ate ac­cel­er­a­tion in com­ing months.

A tem­po­rary breach of the in­fla­tion tar­get band is un­likely to worry the Re­serve Bank that much. It is only a sus­tained breach that will get it to act.

The Re­serve Bank has also cau­tioned that there was not much more that mon­e­tary pol­icy could do to sup­port eco­nomic growth more than it al­ready has.

So far the Re­serve Bank has been tol­er­ant of higher in­fla­tion in the light of weak eco­nomic growth. If it had not been, in­ter­est rates would have been raised more ag­gres­sively than has been the case.

The suc­ces­sive in­ter­est-rate cuts that the Bank has im­ple­mented since the 2009 eco­nomic re­ces­sion have worked their way into the econ­omy, help­ing those with a lot of debt to re­pay that debt at lower rates of in­ter­est.

De­spite rate in­creases since Jan­uary 2014, real in­ter­est rates re­main low and are still help­ing the overindebted.

It is no longer a prob­lem with rates that is play­ing a ma­jor role in con­sumer spend­ing and eco­nomic ac­tiv­ity, but rather the change in how lend­ing in­sti­tu­tions are work­ing.

With in­debt­ed­ness and de­faults high in SA, it is no won­der that fi­nan­cial in­sti­tu­tions have tight­ened their lend­ing reg­u­la­tions.

More peo­ple are ap­ply­ing for credit but only a few are suc­ceed­ing. Hav­ing been burnt in the past with peo­ple de­fault­ing, hav­ing to write off debt and los­ing bil­lions in the process, fi­nan­cial in­sti­tu­tions are more care­ful this time around.

Even the growth in un­se­cured lend­ing has slowed sharply.

The mod­er­a­tion in con­sumer spend­ing com­pared with pre­vi­ous years means that eco­nomic growth will be slug­gish.

Con­sumers will get re­lief from petrol prices, which are lower by his­tor­i­cal stan­dards. But steep elec­tric­ity tar­iff in­creases and overindebt­ed­ness will weigh on dis­pos­able in­comes. Elec­tric­ity tar­iffs will rise by 12,7% in 2015 com­pared with 8% in 2014.

De­spite chal­lenges to con­sumers and their spend­ing, most fore­casts are for the econ­omy to grow by around 2% in 2015. This will be an im­prove­ment on 2014’s 1,5%, but it is still be­low SA’s full po­ten­tial of over 2%.

Bar­clays Africa econ­o­mists are among those ex­pect­ing eco­nomic growth of 2% in 2015.

Bar­clays Africa econ­o­mist Peter Wor­thing­ton says they ex­pect this mod­est growth to be “pretty evenly driven” from the de­mand side, with par­tic­u­lar sup­port from a re­cov­ery in gross do­mes­tic fixed in­vest­ment.

The bank fore­casts fixed in­vest­ment, which con­tracted 0,4% in 2014 due largely to the lengthy min­ing sec­tor strike, to ex­pand 1,6% this year.

The eco­nomic growth of 4,1% in the fourth quar­ter of 2014 is un­likely to be re­peated, as in­com­ing eco­nomic in­di­ca­tors sug­gest.

Man­u­fac­tur­ing out­put, for in­stance, con­tin­ued to de­crease on a year-on-year ba­sis in Fe­bru­ary, though the 0,5% con­trac­tion was much bet­ter than that of 2,4% recorded in Jan­uary.

The pro­duc­tive sec­tors of the econ­omy are still faced with weak com­mod­ity prices, mod­er­ate im­prove­ment in global de­mand and high in­put costs.

The price subindex of the Kag­iso Pur­chas­ing Man­agers’ In­dex (PMI) in March re­flected a re­newed rise in the rate of in­put cost in­creases. The subindex rose to 67,9 in March from 60,4 in Fe­bru­ary.

With labour costs and elec­tric­ity tar­iffs set to rise, in­put costs for pro­duc­ers will con­tinue in­creas­ing in com­ing months.

Whether SA meets the eco­nomic growth fore­casts of 2% or man­ages an even higher growth fig­ure will de­pend on the pace of re­cov­ery in global growth and de­mand, whether lo­cal strikes can be avoided, and whether con­fi­dence lev­els among busi­nesses im­prove fast enough for com­pa­nies to in­vest in ex­pand­ing and cre­ate jobs.

Job cre­ation is un­likely to be stel­lar in 2015. Growth in fixed cap­i­tal for­ma­tion, par­tic­u­larly by the pri­vate sec­tor, is im­prov­ing modestly.

At least where wage ne­go­ti­a­tions are con­cerned, some are go­ing smoothly. Gold Fields has reached a three-year agree­ment with the Na­tional Union of Minework­ers (NUM) and United As­so­ci­a­tion of SA at its mech­a­nised South Deep mine, which em­ploys 3 500 peo­ple.

The deal would give the low­est earn­ers in­creases of 21,46%, 14,76% and 12,97% over three years, tak­ing the ba­sic cash wage to R9 000 a month, says the NUM. But this is only a frac­tion of the gold sec­tor. More talks at other mines are set to hap­pen. SA al­ready knows the kind of detri­men­tal ef­fect a strike, es­pe­cially a pro­longed one, has on eco­nomic growth from the five-month strike at plat­inum mines in 2014.

Avoid­ing a strike, whether short or pro­tracted, in the public ser­vice would go a long way to­wards help­ing SA achieve that 2% eco­nomic growth fore­cast.

Hopes for an ex­port-led eco­nomic re­cov­ery will be sup­ported by the im­prove­ment in the eco­nomic growth of the US and Europe, but dimmed by a slow­down in China’s eco­nomic growth. A large share of min­eral ex­ports is des­tined for China and growth in ex­ports will fal­ter if China de­mands less than nor­mal. The fact that China is shift­ing from in­vest­ment-led to de­mand-led eco­nomic growth also bodes ill for SA as this coun­try does not ex­port man­u­fac­tured prod­ucts to China.

This is the op­por­tune time for SA to in­crease trade with other African coun­tries where eco­nomic growth is boom­ing and de­mand is ris­ing.

Lo­cal man­u­fac­tur­ers have noted, how­ever, that a fac­tor such as lack of in­fra­struc­ture is among the main chal­lenges they ex­pe­ri­ence in es­tab­lish­ing their busi­nesses out­side SA’s bor­ders.

It can only be hoped that the estab­lish­ment of the Brazil, Rus­sia, In­dia, China, and SA (Brics) devel­op­ment bank will move soon to fi­nance African in­fra­struc­ture projects, par­tic­u­larly those re­lat­ing to road, rail and elec­tric­ity.

The South African gov­ern­ment will also con­tinue to spend bil­lions of rand on in­fra­struc­ture devel­op­ment, de­spite its in­ten­tion to curb large bud­get deficits.

Spend­ing on in­fra­struc­ture helps sup­port eco­nomic growth while cre­at­ing jobs for peo­ple.

Au­thor­i­ties in SA want to place more at­ten­tion on growth that is driven by in­vest­ments rather than con­sump­tion.

The only thing needed is more par­tic­i­pa­tion from the pri­vate sec­tor, which has of­ten iden­ti­fied a plethora of leg­is­la­tion and red tape that can get in the way of in­vest­ing.

The eco­nomic growth of 4,1% in the fourth quar­ter of 2014 is un­likely to be re­peated, as in­com­ing eco­nomic in­di­ca­tors sug­gest

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