Reserve Bank Governor Tito Mboweni’s Christmas present to South Africans will be money that costs more.
Mboweni and the bank’s monetary policy committee meet on December 6 and 7 to decide on interest rates. Analysts say an interest rate hike next week of at least 50 basis points is a done deal, but retailers are gearing up for a record-breaking festive season. There are signs that the longed-for 6% growth rate is within range, but consumer demand, if left unchecked, could ruin the party for everyone.
‘We’re lucky the Reserve Bank started early [with the rate hikes],” commented economist Dawie Roodt from the Efficient Group. Otherwise we could be facing a rate hike of as much as 2%, he said, adding that he predicted a 50 basis point increase at the next meeting and another 50 basis point rise in February.
Retailer confidence has reached a new peak, according to a survey by the Bureau for Economic Research and Ernst & Young. Interest rates have risen 150 basis points since June this year, but the Festive Season Retail Trends Survey shows consumer demand has not been constrained. Demand from lower income consumers was a significant driver, as they have benefited from social grants and increased employment levels.
Meanwhile, there are fears that the United States economy, the largest in the world, could weaken still further. Writers for The Guardian newspaper said US Federal Reserve chairperson Ben Bernanke was likely to cut interest rates as the dollar dropped to record low levels, although Bernanke hinted at a rate increase this week.
On Tuesday, Statistics SA released revised growth figures, showing the economy grew 5,1% last year, from a previously reported figure of 4,9%, the highest rate in more than two decades. First-quarter growth was revised upwards to 5% from 4%. Growth in the second quarter of this year touched 5,5% from 4,9%, and in the third quarter growth reached 4,7%. This shows a slight slowing, but is still the 32nd consecutive quarter of economic growth.
Government’s average annual growth target is 4,5% for the next four years, and 6% from 2010 to 2014, to halve unemployment and poverty by 2014. First National Bank chief economist Cees Bruggemans said that even if all other sectors perform at their present levels, agriculture, mining and manufacturing had the potential to push overall GDP growth to 6%. He said about 97% of the economy was already performing at 5% growth, and had been for the past two years.
Finance Minister Trevor Manuel said growth could be even further accelerated, Reuters reported on Tuesday. ‘However, if we do not improve our export performance, our economic performance would not be sustainable, requiring a forced slowdown in growth to rebalance the economy,” he warned.
But growth in consumer demand is outstripping supply. Demand for credit from the private sector reached 27,48% in October, while growth in M3 money supply, an inflation indicator, increased 23,1%. Both these figures were higher than analysts’ expectations, strengthening calls for a rate hike.
South Africa’s boom has been fuelled largely by consumer spending, and analysts fear that increased spending on imports, reflected through the current account deficit, poses a foreign exchange risk. Motor vehicle sales have not yet slowed, Roodt pointed out, which should have happened already.
‘You can’t spend yourself wealthy. That’s what we’re trying to do. It’s good to have demand, but there must be a balance between what we consume and what we produce. We’re spending R100-billion a year more than what we produce, which is reflected in the current account deficit,” Roodt explained.
Ironically, this is exactly what is happening in the US. It has run a current account deficit for years as Americans buy cheap goods from other countries and produce fewer goods themselves. This usually produces a weaker currency, but The Guardian’s Ashley Seagar said the greenback had been shored up because countries such as China had used their current account surpluses to reinvest in American assets. But the dollar has weakened substantially in the past two years, and especially this week.
The Organisation for Economic Cooperation and Development has revised its growth predictions downwards for the US economy. It predicts US growth of 3,3% this year and 2,4% next year, but says this does not necessarily mean the rest of the world will slow down too.
The US housing market has been a source of concern for some time now. This week, data showed that sales of existing homes rose in October for the first time since February, to an annual rate of 6,24-million homes. But while sales were up, prices were down 3,5%. This was the third consecutive month of decline and the worst year-on-year fall since 1968, when records began, reported The Guardian.
But Roodt and Nedbank economist Magan Mistry disagreed, pointing to the increased house sales and Bernanke’s message that inflationary pressures were still present. Mistry conceded that further weakness in the housing market could herald a rate cut, but said the greenback’s weakness was because of other central banks, which hold mostly dollars, wanting to diversify into other countries.
Back home, Mistry agreed that there would be a rate hike before Christmas of at least 50 basis points and said that after that rates would stay neutral. He said a rand trading below the R7/dollar level would ease inflationary pressures, although it would not be good news for some sectors of the economy.
However, US weakness could affect commodity prices, which would mean South Africa would earn less from its exports, of which commodities are a key component.
But Roodt said he did not think dollar weakness would have an impact on South Africa, pointing out that while the dollar has slid 10% against the euro in the past two years, the rand has lost 15% against the dollar in the past five months alone. Although consumer demand needed to slow, Roodt said the supply side of the economy needed to grow, and suggested cutting corporate taxes to stimulate production.