Category Economy
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Domestic economy powers ahead

28 November 2007 Gareth Stokes

As ordinary citizens struggle under the burden of high domestic food and fuel prices, Statistics SA has confounded experts by publishing GDP growth of 4.7% for the third quarter of 2007. Economists believed that the recent spate of interest rate hikes would already have made a mark on the economy through a reduction in growth. The central bank Repo rate is 150 basis points higher since June this year and 350 basis points higher in the last 20 months.

But it appears the economy is more resilient than first thought, meaning we can now almost certainly pencil in another rate hike in December. Chris Hart, senior economist at Investment Solutions told I-Net Bridge that the latest figure is largely historical. “It represents strength in the economy while current conditions are weaker,” said Hart. He believes the latest GDP numbers flatter the real domestic growth situation and expects a significant downturn in the next few quarters.

Brace for 15% prime

“Wow, if that’s a true reflection of the economy I would be very surprised,” said Mike Schussler, economist at T-Sec. “I just don’t know where they got the figures, since manufacturing was negative, as was seasonally adjusted retail sales quarter on quarter.” It is also common knowledge that retail passenger vehicles sales have been on the decline for a number of months now.

Unfortunately Reserve Bank governor Tito Mbwoeni will make his coming interest rate decision based on these numbers, whether accurate or not. Razia Khan, Regional head of research for Africa at Standard Chartered Bank believes: “Overall, GDP remains firm, and with price stability still the main priority – the way is open for the SARB to tighten interest rates a further 50 basis points next week.” Consumers will have to prepare for an interest rate hike in addition to the 30 cents per litre fuel price increase predicted for December.

We are sure consumers will heave a collective sigh on hearing this news. And another hike might be enough to push many overextended consumers over the edge.

Monetary policy has not curbed demand

The fact we are still waiting to see the full impact of the interest rate hikes since June proves how difficult it is to balance money supply and prices in an economy. We have heard economists compare it to adding drops of red dye to a tank of water. After each drop, you observe the water and notice no change – until suddenly one extra drop causes the entire tank to turn. We think the next drop of dye (rate hike) will be the one that turns the domestic economy.

And that’s not a good thing, because at the moment it is the massive private and public infrastructure projects that are causing the domestic price pressures. Construction costs are high and corporate borrowing is going through the roof. These facts are borne out by Stats SA, which records 12.1% growth in the finance sector and a massive 14.7% in construction. Manufacturing is the laggard, contracting by 2.5% for its worst performance in four years.

Ironically, South Africa needs a strong manufacturing sector to boost jobs and underpin growth in coming years. So thus far, the impact of hiked interest rates appears to be affecting the wrong sectors. And of course the hikes are unable to touch sectors like construction because the growth in these sectors has to occur regardless of price increases. The 2010 stadiums will be completed even if costs escalate at 20% per annum.

That now makes three factors that Mboweni cannot control. His interventions do nothing to impact the international oil price, cannot sway the rand dollar exchange rate and will not curb price inflation in the construction and finance sectors. And that leaves the struggling consumer wondering why he has to shoulder another R500 per month on his bond repayment.

Editor’s thoughts:
Stats SA has revised its economic growth forecast upwards to 5.4%. The positive outlook conflicts with views from many economists who believe the country will struggle to sustain this level of growth, even if existing resources are fully employed. Read our feature article “Will government score a goal at their third attempt” for more on that issue. Do you think the Stats SA GDP numbers reflect the economic situation in SA at present? Post your comment online at the end of this article, or send an email to

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