Pressure builds on Marcus to cut interest rate

South African trade conditions fell sharply last month, according to the trade activity index compiled by the South African Chamber of Commerce and Industry (Sacci).

In data released on Tuesday, Sacci's index fell seven points to 49 in June, suggesting a significant drop in consumer and business confidence.

"The key issue is that consumers and business at large are not meeting each other in the market. Tight economic conditions and low business confidence will continue to weigh on trade conditions in the coming months," Sacci's chief executive, Neren Rau, told the Mail & Guardian.

The drop in trade figures is the latest in a string of economic data pointing to tough economic times ahead.

In the first quarter of 2012, South Africa's real gross domestic product (GDP) growth fell to 2.7%, down from 3.2% in the previous quarter of 2011.

Business confidence also dropped with the RMB/BER business confidence index falling by 11 points in the second quarter of 2012, further indicating the harsh economic environment.

"Sacci is right to warn about waning demand, the global economy is slowing down and South Africa can't run away from that," Chris Hart, chief economist at Investment Solutions told the Mail & Guardian.

GDP flatlined
The latest growth figures in Europe – South Africa's largest trading bloc – are worrying.

GDP in the region flatlined at 0.00% for the first quarter of 2012, after it decreased by 0.3% during the fourth quarter of 2011.

While this is not nearly as dire as the back-to-back GDP contractions of 1.9% and 2.5% in the last quarter of 2008 and first quarter of 2009 respectively, there are serious concerns that current lethargic growth could be the beginning of another recession which would have a disastrous effect on South Africa's economy.

The most obvious method of trying to effect immediate positive change on the economy's current trajectory would be an interest rate cut.

The South African Reserve Bank is due to announce its latest decision on the repo rate when its Monetary Policy Committee finishes its latest meeting on Thursday this week.

The repo rate determines the interest percentage at which SARB lends money to commercial banks in the country.

The current level of 5.5% is the lowest that interest rates have been in more than 30 years, with the Reserve Bank reducing the repo rate by 650 basis points since December 2008.

The interest rate was cut by 50 basis points to its current level in November 2010 and has remained unchanged since.

However, Hart warns that an interest rate cut might not be an immediate panacea.

"At the end of the day this will be very difficult to change due to our global partners being unable to increase demand. Even a cut in rates at this stage is not going to help," Hart said.

Rau echoed Hart's sentiment.

"A 50 basis point cut won't help as it would simply bolster cash flow for businesses and consumers. We would need something drastic to affect a positive change," he said.

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