Business needs some help

[Economic Comment by Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation]

At the South African Reserve Bank (SARB) Monetary Policy Committee meeting in March, it was commented that the benign global inflation environment was expected to persist and that the risk of imported inflation was relatively low; this has been reinforced by the strength of the rand to date. Mention was also made of the countercyclical fiscal policy stance in these distressed times.

Despite expectations that the projected fiscal deficit for 2010/11 may be lower on the back of improved revenues, the proposed public sector salary increases are very likely to lead to higher taxes. The SARB also admitted that increases in administered prices are in effect relative price changes or implicit tax increases and “that despite clear signs that the economy has emerged from the recession, the pace of recovery is expected to remain slow. The improved inflation environment has provided some space for an additional monetary stimulus to reinforce the sustainability of the upswing without jeopardising the achievement of the inflation target”.

All of these points are even more relevant in today’s climate. Businesses are battling on all fronts – higher wage demands, strike action, sluggish demand both at home and abroad, tighter margins due to higher production costs which impacts on cash flows and an ever-increasing regulatory burden. While the pace of deleveraging by companies is slowing, the fact is that it has been negative for almost a year. With companies facing difficulties in taking on more employees in the face of such pressures, together with consumers needing a shot in the arm to reduce high indebtedness levels and boost spending, it is not difficult to make a case for the SARB to cut rates by 100 basis points. While we believe that unlikely, the fragility of the outlook demands that at the very least, a 50 basis points cut should be announced tomorrow.