Economic growth weakened to 1.3% in the second quarter of this year from a robust 4.8% in the first quarter. Data on car sales, retail and manufacturing point to further weakening in economic activity in the months to come.
The latest manufacturing data published by StatsSA confirmed the contraction in the PMI1, not at all positive for economic growth. Mining output also contracted over the same period. The weakness in manufacturing output is not only a South African problem; PMI indices in most economies have been weakening in line with gloomier prospects of a global economic recovery.
Fears of global recession
Most analysts have factored in an increased chance of the US and the Euro area going into a recession. Whether it will be a full-blown recession or just a soft patch in growth remains to be seen but neither is good news for the South African economy, in particular manufactured exports.
Although the latest IMF2 economic outlook and the SA Reserve Bank forecasts still point to positive growth for South Africa, the rate of growth has been scaled down from earlier predictions. This is because this country’s economic fortunes are intricately linked to those of the global economy. South Africa will not emerge completely untouched by the headwinds buffeting the global economy: exports will struggle and inflation will rise.
Drop in rand poses a risk to inflation
We have seen the Rand fall sharply in the last week as money has been withdrawn from emerging markets which are perceived to carry higher risk. If this weakness lasts for an extended period it will pose a risk to inflation. The risk of imported inflation such as higher oil and food prices as a result of a weaker Rand will increase. With oil prices already on the high side this might lead to higher petrol prices.
Caution over higher retail sales
There was some positive news on the economic front. Retail trade sales - surprisingly - showed some improvement but any sustained increase in consumer spending depends on employment creation. That is not very promising right now with the outlook for growth diminishing. The latest inflation numbers were positive because inflation did not increase between July and August. However low-income earners still face a far higher inflation rate than the overall CPI rate as their 'shopping baskets' are made up of more high-inflation goods like food and transport costs. This part of the community is hard hit by inflation, a point which the SA Reserve Bank always makes when people misunderstand inflation-targeting as not being pro-poor.
Rates on hold for longer
The monetary policy committee (MPC) of the Reserve Bank met this week to consider the next policy decision. As expected the MPC left rates unchanged with the repo rate at 5.5% and the prime overdraft rate at 9%. Usually when inflation is on an upward trend, we expect interest rates to go up but inflation is increasing alongside a weakening economy so increasing rates now is not an option for the MPC. Indeed, the MPC left the door open for a possible rate cut if deterioration in the global outlook affects domestic economic growth significantly.
As mentioned previously, the ratio of household debt to disposable income is still very high. The current low interest rate is still favourable for consumers to continue paying off their debts as the debt-servicing cost is at historically low levels.
1 Purchasing Managers Index
2 International Monetary Fund