Terence Moll
FORMER Reserve Bank governor Gerhard de Kock once severely criticised South African businessmen, calling them inept in controlling company spending and simply not able to understand fundamental economic principles.
The highly respected governor is on record as having said: “At the start of an economic upswing, our businessmen spend as if boom times are here to stay, but when the downswing comes they blame poor performance on the recession and talk as if the cycle will never turn again.”
This personal finance issue looks at basic economic indicators and what they mean.
* Gross Domestic Product (GDP) is defined as the total output of all goods and services in one country over a year. This figure is compared to the previous year and the percentage number is used to denote economic growth.
For businessman this figure helps to determine movements in the overall business cycle and can therefore be an aid for strategic planning of business objectives. In addition, changes in government fiscal policy often distorts natural cycles and either speeds up or hampers growth.
For instance, when the new government announced its R135- billion reconstruction and development programme, immediately industrial analysts set to work on how this would affect the economic cycle.
They concluded that building, construction and steel companies would benefit the most. On the surface it seems that only businessmen operating in these sectors would gain from the RDP. In fact, if houses are built, then furniture, curtains and electronic goods and equipment would also be in demand.
l Consumer Price Index (CPI) is a measure of the rate of increase in a basket of about 600 goods over one year. It is also called inflation and denotes the average increase or decrease in the price of commodities.
In simplistic terms, if wage increases are less than the inflation rate it means that the individual’s purchasing power will reduce and his ability to buy goods will thus be less.
The economic argument is that there are a vast number of issues which could affect inflation. These include demand- pull, cost-push and a rise in money supply. The first occurs when demand for commodities exceed supply and manufacturers increase price of goods and the second takes place when the cost of producing an item increases (caused by scarcity).
An increase in money supply means that the government is printing more money, which in turn indicates that more currency will be in circulation and often causes demand to exceed the availability of goods and results in a price increase or a rise in the inflation rate.
* The Production Price Index is a leading indicator of the CPI and shows businessmen production cost increases or decreases.
* The Exchange rate is defined as the cost of exchanging South African currency for foreign money. For the businessman a decrease in the value of the Rand against a trading partner would indicate an increase in the cost of importing goods, while for the exporter would mean an increase in income.
There is usually a lag effect between exchange rates and the retail unit cost. For instance, if internationally the United States dollar appreciates while the rand remains static, it would result in manufacturers paying more for imported US goods. They would incorporate these increases in prices charged to retailers, who would in turn push up their prices.
* The prime rate is essentially the cost of borrowing from the banks. An increase in the rate provides businessmen with a warning that interest bills will climb and, therefore, reduce pre-tax profits.
* Building plans passed is a leading indicator of economic activity and shows building contractors that more work is on its way.