There were two reasons to cheer this week as first the economy showed signs, although small and patchy, that a recovery was under way and then consumer inflation dropped into the 3% to 6% target range.
At 5.9% higher than this time last year, the consumer price index (CPI) was measured below 6% for the first time in more than 30 months.
The drop in CPI surprised some economists, who said that it offered scope for the Reserve Bank to cut rates by 0.5%.
South Africans are breathing a collective sigh of relief as gross domestic product (GDP) figures show how the country is slowly leaving the recession behind it, rising to 0.9% in the third quarter of 2009.
The GDP figures followed a further positive move in the Reserve Bank’s composite lead indicator, which rose 1.9% month on month for September.
But economists warn that the recovery is not across the board and with the close to one million jobs lost during the recession, consumer demand is still shaky.
In addition, as the economy kicks back into high gear, it still faces considerable constraints, particularly from Eskom, which has requested a 45% tariff increase annually over the next three years.
The moderation in inflation since the start of the year is indicative of the dire state of the economy, said Investec’s Kgotso Radira.
‘Inflation on the month saw an increase only from the food and alcoholic beverages.
‘Food price inflation increases slightly as demand gains momentum towards the festive season. However, prices are unlikely to increase as rapidly as in previous years.â€
According to economist Mike Schussler, growth may be severely hampered if Eskom is given the increase by the National Energy Regulator of South Africa (Nersa).
Schussler said the country’s growth could be constrained by between 1% and 1.5% if Eskom’s tariff application is granted.
Although the country appears to be on the recovery path for 2010 the economic slowdown has offered Eskom some relief from high demand on the national grid because of a wide industrial slowdown.
The power utility has indicated that energy efficiency and power conservation will be back on the cards as demand begins to rise again. This could hamper economic output from key sectors, such as mining.
In the numbers released by Stats SA on Tuesday mining showed a continuing decline; down by 5.8% from the second quarter to the third.
But manufacturing and construction showed growth — with manufacturing rising by 7.6% quarter on quarter (q/q) and construction by 6.1% q/q.
Despite the growth in manufacturing, the sector — with trade — saw some of the greatest job losses in the third quarter.
In total South Africa has lost about 959 000 jobs in 2009, and the unemployment rate has risen to 24.5%.
Stanlib economist Kevin Lings warned that recovery ‘remains fairly fragile†given the poor performance in retail sales and financial services.
Wholesale and retail trade fell by 1.1% in the third quarter and finance, real estate and business services were down by 1.5%.
The worst performer, however, was agriculture, forestry and fishing, down 9.8%.
Investec warned that with the improvement in the GDP figures, the possibility of any further interest rate cuts is unlikely.
In fact there was a chance of the Reserve Bank increasing rates sooner than anticipated.
Despite the threat of rising interest rates, Schussler believed the impact of electricity hikes on domestic consumers will be far greater.
He said there are more than 12-million electricity accounts in South Africa, but there are only 1.8-million mortgage accounts.
Rising electricity prices have a much wider impact than rising interest rates.
Schussler warned that consumer inflation could rise to more than 8%, thanks to the second round effects of electricity hikes.
The national treasury expected growth to recover to about 1.5% in 2010 with the International Monetary Fund (IMF) expecting it to reach 1.7%.
Schussler estimated that since 2005 local electricity prices have increased by about 91%.
Should Eskom get its preferred tariff increase, cumulative electricity prices will have risen by 633% between 2005 and 2014, said Schussler.
But following feedback on its tariff application from parties such as the national treasury and the South African Local Government Association (Salga), Eskom could revise the figure. It is due to be handed over to Nersa on Monday.
Eskom could well rework the figure of 45% to something lower. It is understood that government is not in favour of such a large increase and is considering a number closer to 35%.
A reworking of the application will not come without risks as the 45% increase still leaves Eskom with a R30-billion funding gap.
Such a proposal will have to be less reliant on Eskom, making room for a number of alternatives, including independent power producers, power imports, greater energy-efficiency measures and the possible inclusion of private players at Kusile, a second coal-fired power station being built by Eskom.
The questions of funding Eskom’s build has been under the spotlight again.
Talks have begun between the government and the World Bank to secure funding for the embattled parastatal.
The bank released details of the $3.75-billion investment that is proposed for Eskom.
According to the fact sheet supplied by the bank, the loan will include $3-billion for the Medupi coal-fired power station, $260-million for renewable energy (wind and concentrated solar power) and $490-million ‘for low-carbon energy-efficiency components comprising road to rail conversion for coal transportation and power plant efficiency improvements.This component will include a technical assistance programme (about $20-million) for improving supply-side efficiencies.â€
A final decision on whether South Africa will receive the loan is expected only in the first half of next year.
