According to the Medium Term Budget Policy Statement (MTBPS) released on Tuesday in Parliament, the National Credit Act (NCA), and the fact that South African's could possibly face another interest rate hike in December, were factors singled out for the calming effect on consumer spending.
In South Africa, as with any small and open economy, rapid increases in investment spending put pressure on domestic capacity, raising imports and increasing prices.
The MTBPS noted that “investment has played a major role in strong economic growth, rising from about 15% of Gross Domestic Product (GDP) in 2002 to nearly 21% in the first half of 2007.
“The ratio of fixed investment to GDP of 25% by 2014 should be achieved ahead of schedule, helping to reduce capacity constraints and supporting sustained higher growth.”
The decline in the sale of motor-vehicles and other interest-sensitive durable goods has indicated positively that South African's are tightening the purse strings to a degree.
Despite South African Reserve Bank (SARB) Governor Tito Mboweni's repeatedly warning the public that rampant consumer spending would only further fuel inflationary pressure, household consumption expenditure continued to rise at a rate of 7.4% in the first half of 2007.
The Consumer Price Index excluding mortgage costs (CPIX), which is used by the SARB for inflation targeting, has been outside the prescribed 3-6% target band set by the Bank since April 2007.
Analysts believe inflation has not yet peaked and will only do so by about February of 2008, returning to within the inflation range by the second quarter of next year.
The MTBPS indicated that, “external shocks to food and oil prices have been the primary drivers of inflation over the past year, but inflation pressures have broadened recently due to the weaker Rand, buoyant demand and capacity limits in domestic industry.
“There is [also] significant wage pressure in the economy following a series of strikes in the first nine months of the year. Average wage settlements are expected to be in the range of 7 to 8% in 2007 from 6.5% in 2006.”
The inflationary cycle which began in June last year reflects the growing need for more balanced growth in the economy. The National Treasury believe this can only be achieved through a moderation in household consumption, and as constraints ease as a result of sustained investment.
Speaking at Parliament on the MTBPS, Minister of Finance Trevor Manuel highlighted that “as the economy has grown more rapidly, it has begun to show signs of strain, reflected in rising inflation and a high current account deficit.”
He said the purpose of the MTBPS was to present a framework and a set of spending priorities to shape the budgets of national, provincial and local government.
“It is intended to encourage parliamentary and public debate on how South Africa will meet the social and economic challenges ahead,” said the minister.
Article published courtesy of BuaNews
