Recovery depends on reluctant consumers

News that output expanded by 3.2% in the final quarter of last year, well above consensus forecasts of 2.5%, have convinced some that the pace will be sustained this year.

But actual levels of activity are still well below last year, and most of the impetus stems from global demand for local exports, or the rebuilding of inventories.

Official spending is also a key driver of the pick-up in growth.

Consumers are still reluctant to spend, and as they account for about 60% of the economy, this is a concern for policy makers.

Retail and wholesale trade fell by 0.7%, shrinking for the seventh quarter in a row, data from Statistics SA showed yesterday, 23 February 2010.

“Everything points to a technical recovery, but with few indications that a particularly robust recovery can be sustained,” said Razia Khan, regional research head for Africa at Standard Chartered.

“An important lag is still at work, and the South African consumer has yet to resurface.”

Heavy job losses during last year's recession are seen as the main deterrent to battle-scarred consumers. The economy shed nearly 900000 jobs as output shrank by 1.8%, marking the economy's first contraction since 1992.

The pick-up in growth during the final quarter of last year was driven mainly by factory output, which surged by 10.1% compared with the previous quarter.

A key industry survey suggests that employment in the sector, SA's second biggest, rose last month for the first time since April 2008.

But many analysts say the pace of growth in the economy this year will not be enough to restore all the jobs which were cut last year.

That is likely to keep consumers wary, which in some ways, is not a bad thing, given that many got themselves deep into debt when the economy was booming.

Citigroup economist JeanFrancois Mercier points out gross domestic product (GDP) rose by R18bn over the past two quarters, after shrinking to the tune of R51bn in the previous three quarters.

“This puts things into perspective and highlights that, while GDP is bouncing back quicker than consensus expected, it is still weak in absolute terms,” he said.

The big question is whether the Reserve Bank will decide that household demand is fragile enough to warrant a rate cut when it holds its next policy meeting.

Its decision is due on 24 March, a day after the release of its first quarterly bulletin for this year, which will give a detailed picture of the “demand” side of the economy, including household consumption.

“Concerns about the sustainability of the recovery might compel the Bank to cut rates again, if inflation remains benign,” said Barnard Jacobs Mellet economist Elna Moolman.

Many analysts believe the Bank will opt to keep its repo rate steady at 7% for the rest of this year. But a decision on Eskom's request for hefty power price hikes this year, due today, could have a big effect on SA's inflation outlook.

Source: Business Day