Government consumption expenditure is increasing, but although it’s the main driver of the local economy it’s also indirectly pushing up inflation. According to economist Mike Schüssler and BoE Private Clients’ Daryll Owen, this trend is unsustainable and will have negative effects on the economy.
With household consumption expenditure only mildy up and inflation being largely driven by non-consumer forces, Schüssler and Owen feel that the Reserve Bank should keep interest rates unchanged in the short term.
Concern about government’s share of economic activity is growing and Schüssler says that, at the same time, growth in sectors like property and construction remain far below the levels seen before the recession, which impacted on South Africa in 2008 and 2009.
Daryll Owen, Chief Investment Officer at BoE Private Clients, says that, while the release of GDP data by Statistics SA at the end of May showed that the economy expanded by 4.8% in the first quarter of 2011, up from 4.4% in 2010, much of the growth can be attributed to growth in household consumption expenditure (HCE) as households benefit from the lower interest rate environment.
Data released by the SA Reserve Bank in June, also shows that government continues to expand consumption expenditure at a rapid pace.
Unfortunately, government investment expenditure continues to decline despite the infrastructure backlogs of the SA economy.
“Consumer inflation rose to 4.2% from 4.1% in March, while private sector credit extension and M3 trends remained subdued. This would suggest that the inflationary pressure being predicted by financial analysts to occur before year-end is not the result of excess demand in the economy,” says Owen.
Furthermore, the rebound in manufacturing data during the first quarter shows that the strong rand is not as bad for the economy as trade unions and some politicians seem to believe, Owen says.
“Inflation pressures locally are driven by higher international food and fuel prices and rising administered tariffs, not excess demand. As such, tighter monetary policy will have no effect other than impacting negatively on economic growth. Short of the rand weakening significantly in the short term, we maintain our view that inflation will be temporary and that the SARB should therefore maintain interest rates at current levels,” he asserts.
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