The IMF1 recently downgraded the global economic outlook for 2012 and 2013 due to concerns about a possible recession in the euro area. This will have a negative impact on South Africa’s growth prospects for the coming year.
Slower growth but no recession
In announcing its interest-rate decision last month, the SA Reserve Bank indicated that its GDP forecast for 2012 was revised marginally lower as global growth remained on an uncertain path.
Notwithstanding the gloomy global outlook, South Africa is not expected to go into a recession at this stage. The growth rate for the fourth quarter of 2011 is expected to have improved further from that of Q3, bringing the annual growth rate for 2011 to 3%.
There are many factors beyond the control of South African authorities that will affect domestic growth. The most obvious one is the deteriorating economic situation in Europe which will affect us through trade and the financial markets.
As with the last recession, we will just have to ride out the storm; the major difference now is that there are not many options left for both monetary and fiscal policy to accommodate a sharp fall in growth.
Government spending
Fiscal policy has been very accommodative as government has spent more than it receives in tax revenue. As a result the budget deficit has widened to about 5.5% of GDP. The bulk of the investment expenditure that took place in the economy was mostly from the public sector. Private companies reserved their cash in the face of uncertainty about the economy and government policy. The upcoming Budget Speech will be crucial in terms of the government’s policy in an economy of declining revenue inflows.
Interest rates support growth
Monetary policy continues to accommodate and support growth. The SARB left interest rates unchanged in the January meeting; importantly there is no reason to expect a change in the policy outlook in the near term. This means that the cost of servicing debt will be favourable for highly indebted consumers who can continue paying off their debt. The economy moves in cycles; the low-interest cycle will end as the bank starts tightening policy so those who are highly indebted should make the most of this cycle.
Consumer spending required
A high debt level is one of the constraints that consumers have on their ability to spend; it’s important therefore that consumers continue to spend and support domestic manufacturers, retailers and other service providers. Around 60% of GDP calculated from the expenditure side is household consumption expenditure.
Impact on savers
While low interest rates are beneficial in terms of lowering debt they do disadvantage those consumers who depend on interest income. It is important to encourage South Africans to save and there’s no denying that low interest rates do hurt. However, looking back at periods where interest rates were very high there is no evidence that the poor saving culture is a result of low interest rates.
Hopefully through initiatives like the savings month run by the SA Savings Institute, we might see an ethos change. Also, the fact that one needs a deposit for buying large items like cars and houses will force people to save up first in order to afford this.
It is important to seek expert financial advice on the best instruments in which to invest your money when inflation is on the rise and interest rates are low.
Inflation fears
Another risk to growth is inflationary risk. Inflation is the other major constraint on consumers’ ability to spend. It’s highly unlikely that nominal (‘real’) wages will increase at the same rate they did last year which means that consumers’ discretionary income will be negatively affected.
Food inflation, which has increased sharply over the last few months, is expected to level out soon in line with international food prices. This leaves the usual culprits for inflation being administered prices like electricity, which will go up soon. This will be the last of the Eskom tariff increases announced three years ago. As the power station construction is still on-going, it’s not inconceivable that Eskom will approach the energy regulator for further increases. As it is, inflation is expected to remain outside the target throughout 2012 and only revert to target in 2013.
The outlook for consumers for 2012 has not improved significantly from last year and will largely mirror the slow pace of domestic economic growth.