Economic comment by Luke Doig

Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation.

Credit Guarantee’s weekly adverse indicator - a financial health barometer of firms across the entire economic spectrum – has recently spiked into territory normally witnessed in the early months of the year.

This is especially worrying as businesses and consumers face headwinds associated with imminent interest and utility price increases. RMB/BER’s Business Confidence Indicator has averaged 45 since the start of 2010 as firms struggle to negotiate the difficult currents. Worryingly for consumers and overall demand in the economy is the fact that household debt to disposable income (at 78.4% in the first quarter of 2015) is resuming an upward trajectory and the consumer wallet is yet to feel the full extent of rising inflation as food prices begin to rise. The fuel dividend that benefited the economy in late 2014/2015 is all but behind us and the current accumulated petrol price under-recovery stands at almost 47 cents per litre although thankfully the diesel price adjustment is set to be far more subdued.

To date the economy has not been subjected to strike disruptions but that is not certain to prevail. A number of notable and sizeable companies have entered into business recue proceedings, indicative of an extremely challenging operating environment and the upward tick in our adverse indicator is warning of higher potential payment defaults in the near term. While we have dodged a few bullets of late with sovereign ratings being re-affirmed; the current account deficit has narrowed marginally; and the power crisis appears to be being managed; we may well be walking a tightrope. While we have no desire to see a tidal wave of payment defaults, business failures and further job losses, we are mindful that a sharp reversal in foreign flows and exports that fail to perform in the face of power shortages, could see further rand weakness. Interest rates are going to rise in the short-term and they may do so faster than generally expected; and labour may get increasingly vociferous and violent. Can we avert this? Most certainly. But we can only duck for so long.