The latest economic indicators signal a worse than expected slowdown, writes Max Gebhardt
A HIGHER than expected jump in the inflation rate for September and falling consumer spending have forced economists to downgrade growth forecasts severely for 1997.
The consumer price index (CPI) climbed by a full percentage point to 8,4% in August and growth forecasts have been scaled down to 2,5% or less next year.
The continuing slide in the rand will contribute to the pressure on inflation by feeding into import prices. At the time of going to press, the rand was trading at an all-time low of R7,3161 against sterling, and at a two-month low against the dollar of R4,5770. The Reserve Bank had stepped in to lend strength to the ailing currency earlier in the week, but South Africa’s reserve position is too weak to continue propping up the ailing currency.
The CPI come in at the top end of analysts’ forecasts. Predictions had ranged between 8 and 8,5%, but the majority were hoping for a sub-eight percent rate to boost the stock market.
A sharp jump in food prices to double digits – the first since June 1995 – was the driving force behind the rise in the CPI. The annual increase climbed to 10,4%, 2,5% up on the previous 7,9%.
Economists said they hadn’t expected such a sharp rise in the inflation figures and said further poor economic indicators might force Reserve Bank Governor Chris Stals to raise interest rates in the short term.
They are predicting a year-end exchange rate of R4,70 against the dollar and inflation within the 8 to 9% range, although some fear it could reach double digits.
Looking ahead to 1997 the prospects are not rosy. Economists expect the current downturn to worsen, with forecasts of a slowdown to 2,5% or less next year, in what Sanlam chief economist Johan Louw terms a “moderate growth recession”.
“The South African economy is showing signs of decelerating,” Louw says in his October economic survey.
He cites sustained high interest rates, weakening business confidence, a marked decrease in the inflow of foreign capital and expectations of a significant fiscal tightening in next year’s March Budget as contributing factors.
Economists are also concerned that the downturn in consumer spending from 4% in the second quarter #might be steeper than expected because pre-emptive buying in the second quarter may leave little room for spending next year. One senior economist has scaled down personal consumption expenditure estimates to 2 to 2,5% for 1997, against an annual forecast of about 3% for this year.
Adding further gloom, the latest insolvency data show a significant increase in July over the previous three months – the first year- on-year increase in the number of insolvencies since March 1993.
Economists say greater insolvencies could be the start of a marked deterioration of the financial position of individuals and may herald an increase in the number of bad debts over the coming year.
According to Edward Osborn, economic consultant for Edey, Rogers, a general malaise is still hanging over the manufacturing industry. Growth points are confined to the petroleum products industry and the non-ferrous metals industries, where there have been substantial capital investments in plant in recent years.
“Broadly, industry is being hammered by foreign competition and foreign supply,” Osborn says in his latest economic survey.
The slack in manufacturing, in Osborn’s opinion, has done nothing good for employment, which has sagged with production output. The shift towards capital-intensive plants and the modernisation of technology has contributed to this.
“An examination of the analysis of these trends is sufficient to dispel the optimism evident in government’s macro-economic strategy document about the employment- creating potential of further industrialisation and manufacturing growth,” he says.
But not all is doom and gloom, as economists are confident that there will be a cut in interest rates by next year.
However, Louw said he did not expect a reduction in the bank rate before the first quarter of next year. Some economists are predicting an even steeper cut in interest rates than expected, though it might be longer in coming than anticipated.
WorldGroup Banking, in a poll of six economists, predicts interest rates will probably remain flat for the rest of 1996 and move lower next year.
“In the medium to longer term the expectation is for rates to move downwards with no upward potential,” it said.
It said the country’s balance of payments situation remained a worrying factor. “The shortage on the current account as well as volatile capital flows can cause a lot of uncertainty,” it said.
Even so, most economists don’t expect the current slowdown to extend beyond 1997 and are confident of an upturn in 1998.