LOOKING AT GROWTH OF 2% AND RISING COSTS
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