Slower economic growth and a shift in consumer borrowing patterns point the way to a cut in interest rates in the second half of the year, reports Madeleine Wackernagel
FIRST-QUARTER gross domestic product (GDP) figures, released this week, confirmed the anecdotal evidence provided by retail sales: growth is slowing down. This should soon feed through to the monetary statistics, paving the way for a cut in interest rates in the second half of the year.
Taken together, the batch of statistics released this week paints a mixed picture: GDP for January to March was 0,8% down on the previous quarter, but 2,3% up on the same period last year. Inflation, however, measured 9,9% for April, albeit compared with an abnormally low figure for the same period in 1996 of 5,5%. Private credit extension was up sharply at 16,95%; while M3 growth was down, to 15,44%.
“The pick-up in the consumer price index is not as serious as it would seem at first glance,” says Dennis Dykes, chief economist at Nedcor, “because it reflects the excise duties incorporated in the March Budget, as well as coming off a very low base. Tobacco duties, for instance, were up 7,8% month- on-month. So, the 9,9% out-turn is still within the bounds of reasonableness, and indeed, had been predicted.”
The drop in the money supply, as measured by M3, from 16,46% in March was a welcome surprise, says Dykes.
However, the credit figures are somewhat more worrying, he says, but when broken down into categories point to a shift in borrowing patterns. Those describing economic activity are sharply lower, on a quarterly basis. Leasing finance was down, mortgage finance up slightly, but the biggest jump was in “other loans and advances” – financing not connected to the purchase of an asset. This can reflect financial market activity or “desperation” borrowing, because it is so expensive, and marks the beginning of a turnaround in credit patterns.
“So there is a strong signal that credit is coming off,” says Dykes. “As long as this trend continues for the rest of the year, we will definitely see a cut in interest rates.”
The size of those cuts is determined by the extent of the slowdown. “We’re in a growth recession at the moment – a temporary period of low economic growth, not a full- blown downturn. We still think GDP growth is on track for 2 to 2,5% for the year as a whole.”
Such a rate is normal at this stage of the economic cycle, says Dykes. Much more investment took place than expected at that stage in the economic cycle in the post- 1994 election euphoria; then there was pre- emptive buying last year in anticipation of higher prices as the rand fell.
But, says one analyst, final demand is providing a more accurate guide to the real state of the economy, and on this measure, definite signs of a slowdown are evident, with company results weakening in the consumer sector.
And while the logical response to falling demand should be a drop in interest rates, Dr Chris Stals, governor of the Reserve Bank, will want to be sure of several factors before making such a move. First, the slowdown in private sector credit extension will have to be maintained over several months, otherwise he risks sending the wrong signal to borrowers.
Second, he will not risk undermining the rand ahead of the exchange control moves in July and the consequent threat of capital outflows and a squeeze on reserves.
As recently as April 24, Stals hinted, none too subtly, at the possibility of the rate rise because the monetary statistics were still way out of target range.
That, says Rudolf Gouws, chief economist at Rand Merchant Bank, was a signal of his possible intentions if credit growth had not turned around. The latest data should convince him that the consumer has learnt his lesson.