Weak credit extension, sales data show SA lags in cycle
August 11, 2009
By Ethel Hazelhurst
Weak growth in credit extension and declining retail sales are signs South Africa is lagging the global economic cycle.
This is according to Razia Khan, the head of Africa research at Standard Chartered.
Khan predicted that figures due later this month on gross domestic product for the period between March and June would show shrinkage for the third consecutive quarter.
And she warned on Friday that there could be structural as well as cyclical problems. While cyclical weakness is followed by a period of strength, structural flaws are permanent, unless they are remedied.
Discussing the cycle, Khan said confidence was returning in most major economies - a trend reflected in purchasing managers' index (PMI) improvements in those countries. A score on the index above 50 points indicates growth and below 50 points shows contraction.
Reuters reported last week that Chinese PMI data showed "a fourth consecutive month of growth", while the PMI in the UK rose to a 17-month high of 52.2 points last month, indicating rising activity.
And The Independent said that in the euro zone, the manufacturing purchasing managers' survey for last month showed "the second-largest improvement in the survey's history, taking the PMI up to an 11-month high of 46.3 points and substantially nearer to that crucial 50 level".
Khan compared this improving picture with the situation in South Africa, where the Kagiso PMI registered "a surprise fall to 37.3 points in July from 37.9 points in June, with business activity and new sales orders both registering new slumps".
Moody's Economy.com was upbeat about exports: "Nascent signs of a moderating global recession suggest the recent uptick in external demand for commodities and manufactured goods will continue, gradually helping lift South Africa out of the mire."
But the research house said the local economy was behind the curve. "South Africa was late to succumb to recession, and recent dour economic data suggest it could lag the global recovery. Most indicators depict an economy that is still losing ground, while others are beginning to firm."
In the circumstances, Khan has changed her forecast of no reduction in interest rates and now predicts a 50 basis point cut when the Reserve Bank's monetary policy committee meets tomorrow and Thursday. The bank held its repo rate at 7.5 percent in June, after cutting it from 12 percent last December.
But Khan pointed out: "The decision by the national energy regulator to approve a 31.3 percent hike in electricity tariffs, revealed only hours before the June interest rate announcement, appears to have had much to do with that decision."
And she argued: "Since then, much has changed. Consumer inflation has been trending down more forcefully, helped by a strong base effect. The producer price index has moved further into negative territory. Money supply growth has all but collapsed."
Though the market is not pricing in a further rate cut at this point, Khan said: "The balance of risks has shifted meaningfully and renewed rate easing is now more probable than not, in our view."
She said the poor economic data could show that South Africa lagged the global economic cycle. But she spoke of "growing concerns that rand strength, at a time of subdued external demand, may result in structural damage to the country's manufacturing sector, with lost ground never regained".
According to Bloomberg, the currency has gained more than 16 percent this year. But it ended last week softer, with the exchange rate at nearly R8 a dollar from R7.80 a week before.
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