The South African Reserve Bank kept rates unchanged during the last meeting of the year despite the evident weakness of the economy as concerns over inflation remain.
The initial forecast for South African economic growth at the beginning of the year was 3.2 percent for 2012. Since then there has been numerous downward revisions from local analysts, National Treasury, the South African Reserve Bank and even from the International Monetary Fund. The widespread revisions were a result of a general weakening of the global economy.
That was manifested in lower export volumes as global demand for SA manufactures waned. The poor trade numbers are reflected in the widening deficit of the current account which is expected to exceed five percent of GDP; this has implications for the exchange rate of the rand which weakened significantly in the closing months of 2012. This was partly a result of investor aversion to the risk posed by the protracted and largely violent labour unrest in the mining sector and also the transport sector. Mining sector output declined as a result. This does not bode well for employment in this sector and also for any improvement in the sector's investment appetite.
GDP for the third quarter of 2012 increased at a paltry 1.2 percent compared to a fairly respectable three percent recorded during the second quarter. The work stoppages in the mining and transport sectors contributed to the slowdown in GDP growth. In addition, the manufacturing sector's performance was hampered by poor export growth. The performance of the trade sector has also slowed down reflecting the pressure that consumers are under. Notwithstanding that, the trade sector contributed 0.6 percent to the growth in the third quarter.
Unsecured lending a boon and threat
Despite the weak overall economy, consumer spending boosted retail sales through the year with support coming from access to unsecured credit. The growth in unsecured lending has been a cause for concern and some debate thorough the year but the SARB (South African Reserve Bank) maintains that it's not concerned about systemic risk because this remains a small part of total credit extended. With inflation edging towards the upper band of the target the concern is what would happen to consumers' ability to service their debts should interest rates go up.
As the year winds down these three things emerged as concerns for the MPC and they will carry through to 2013:
- The high wage settlements from the strikes in the second half of the year will likely lead to a generalised expectation that most industries should settle at these high rates. Unfortunately this will lead to some people being retrenched when companies are unable to sustain higher input costs like labour.
- The concerns for administered prices like electricity adding to inflation remain top of mind with Eskom having asked for a 16 percent increase over three years if Nersa approves.
- The deficit in the current account is a concern and growth in Europe seems unlikely to improve soon.
There seems to be little room for a rate cut. The best scenario is rates remaining unchanged for a while.
Tendani Mantshimuli is a consumer economist at Liberty.
Article published courtesy of Liberty Life.