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What growth?

04 June 2015 Luke Doig, Credit Guarantee
Luke Doig, Senior Economist at Credit Guarantee Insurance Corporation.

Luke Doig, Senior Economist at Credit Guarantee Insurance Corporation.

The Reserve Bank has warned that interest rate hikes are inevitable, given the medium-term inflation outlook and that this will not unduly sacrifice growth. What growth?

Luke Doig, Senior Economist at Credit Guarantee Insurance Corporation, comments, “The composite leading business cycle indicator is trending ever lower and the country is unlikely to realise growth of 2.5% by 2017. Stats SA informs us that almost 470,000 people were added to the ranks of the unemployed over the course of the last year. June has seen fuel prices hiked by almost 50 cents per litre and with current under-recoveries running at almost 70 cents per litre for petrol and 50 cents per litre for diesel, this could take petrol prices to within reach of the peak of R14.39 per litre seen in April last year. That was when the exchange rate was around R10.50 to the US Dollar; it is some 15% weaker now. And then we have mooted electricity price hikes of an additional 12.6% which will hit industry and consumers hard. The OECD expects global growth to slow this year to 3.1% from 3.3% last year, so local manufacturers and exporters have their work cut out.”

This was further reinforced by HSBC’s local manufacturing PMI falling to 50.1 in May from 51.5 in April, indicating that a meagre majority felt that operating conditions were satisfactory. Consumer spend grew at a pedestrian pace of 1.4% last year while savings by households (as a percentage of disposable income) contracted for the ninth consecutive year in 2014. So as the economy limps along, is it opportune to hike rates? To counter that, it may not be wise to just hike prices like every utility does.

The much-lauded National Development Plan is in effect a lame duck as factions within the ruling party seek to benefit where they can. The country needs a game changer in order to boost potential growth from 2.5% to above 4% but that is unlikely given the myriad of constraints facing the economy. Cadre deployment has been a dismal failure and taxpayers are being asked to foot the bill.

“We remain concerned at the brittleness in confidence at present, but this reflects the challenging environment. Our payment default leading indicator remains elevated and is likely to remain so in the coming months,” concludes Doig.

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