Domestic demand in the South African economy is generally slowing, with companies seeing lower growth in demand for their products, although some pockets of resilience do exist, according to international investment bank Merrill Lynch.
In a research report released on Tuesday, Merrill Lynch economists Nazmeera Moola and Jos Gerson conclude that, according to an informal survey of about 15 companies across different sectors of the South African economy they conducted recently, while exports are indeed leading the slowdown in demand, by and large local companies are looking for flat growth in 2003.
“There are pockets of resilience in the economy–notably construction and
beverages,” they write. “However, there are also pockets of weakness, including motor deals and electronics and appliance vendors. Going forward, most companies are expecting conditions to improve in 2004.”
According to the survey, retail demand was a “mixed bag”, with vehicle dealers and household goods and electronics retailers reporting flat demand and tighter margins, and appearing to be the worst affected. The clothing sector also appeared set to slow, with companies generally reporting tougher trading conditions than 2002, although reports varied from group to group.
In contrast, food and beverage retailers reported buoyant demand, to be facilitated by lower consumer and producer prices in the second half of the year. Sentiment in the construction sector remained healthy, tempered by expectations of a “reasonably flat” second half of 2003, to be followed by a pick-up in early 2004, they say.
Conversations with packaging and transport companies showed that exports were leading the slowdown. However, domestic demand also appeared to be suffering.
“Overall demand does appear to be slowing, with event the most optimistic companies generally expecting flat volume growth in the second half of the year,” they write.
“There are several factors that should provide support to the consumer as the year progresses, notably healthier consumer balance sheets, tax cuts and higher house prices. However, last year’s interest rate hikes, the effective decline in real wages and increasing unemployment will provide substantial headwinds.
“Given the uncertainty of the current situation, the outlook for consumption growth seems dependent on the upcoming wage settlements and the speed at which the South African Reserve Bank cuts interest rates. We are looking for 100 basis points in August, to be followed by a further 100 to 150 basis points by year-end, thus leaving rates at the levels we saw at the start of 2002.”
Merrill Lynch is forecasting South Africa’s consumption growth at 2,5% in 2003, down from 3,2% in 2002, while domestic demand is expected to rise only 2,7% in 2003, versus 4,2% in 2002. The investment bank is predicting 1,8% gross domestic product (GDP) growth for South Africa for 2003. – I-Net Bridge