Look into the crystal ball

Article tools

	PRINT ARTICLE
	SEND TO FRIEND

Services

	Subscribe to newsletters		Feeds
	Become a Facebook fan		Follow Moneyweb on twitter

Gordhan to Marcus: I got your back

Unequivocal support for inflation t...

Taxed to death

South Africa’s taxpayers really can...

Ring-a-ding-ding

Sunny economic news for everyone.

What do the latest economic indicators really tell us?

PHILADELPHIA - Three recent pieces of economic news paint a mixed picture of South Africa's economy in 2010. Last week saw both the release of encouraging GDP growth and consumer price inflation (CPI) figures and the more negative news that Eskom would be raising prices by around 25% a year for the next three years.

The GDP and CPI numbers were pretty positive. Statistics South Africa (StatsSA) reported last week that GDP (a measure of total economic output) grew by a higher-than-expected annualised 3.2% quarter-on-quarter (q/q) in the fourth quarter of last year.

This is the second quarter of growth in a row, and a marked improvement on the growth of 0.9% q/q recorded in the third quarter of 2009. It seems to suggest that the economy is now decisively out of the woods recession-wise.

However, it wasn't unequivocally positive news. Although manufacturing, construction and mining showed robust growth, and banking returned to growth territory after three consecutive quarters of decline, trade (which includes wholesale, retail and motor trade and accommodation) remained weak. This weakness points to the ongoing problems in consumer demand: South Africans are just not spending money and the main reason they're not is that they don't have any.

In a report released last week by Unisa's Bureau of Market Research titled "Personal income patterns and profiles for South Africa, 2009", researchers noted that South African's personal income shrank by 1.2% in real terms in 2009. With less money in their pockets, people are cutting back.

These figures, together with other numbers we've seen, like the growth in the unemployment rate and the rise in credit defaults, paint a general picture of consumers under stress, despite the end of the recession.

What we may be seeing is economic recovery coupled with declining living standards and rising unemployment. This is the pattern that's emerging in the US and elsewhere, as companies hesitate to take on more staff while they wait to see if economic improvements are sustainable. While not unexpected, it's also not a comfortable situation for ordinary South Africans.

Furthermore, despite generally positive reception of the GDP numbers, some economists, like Metropolitan Asset Managers' economic analyst Ilke Smit, were more cautious. Smit pointed out that the growth was off a low base, and warned that the categories of GDP that expanded most strongly were those that were best positioned to benefit from global stimulus measures, like manufacturing. The implication is that once stimulus measures are unwound, weakness could reappear.

Indeed, as Stanlib economist Kevin Lings noted, "The sustainability of South Africa's economic recovery into 2010 is highly dependent on a pick-up in consumer spending, which itself is linked to consumer confidence and employment conditions." Until consumer confidence, employment and personal incomes improve South Africa's economic recovery remains on shaky ground.

CPI figures released by StatsSA last week were more encouraging. Although it remains above the 6% upper limit of the Reserve Bank's target range, at 6.2%, January's CPI was lower than economists expected, and was down from December's 6.3%. Many economists expect that CPI will fall back into the target range in February, and will likely stay there for the rest of the year.

This is where the announcement from the National Energy Regulator of South Africa (Nersa) about Eskom's tariff increases for the next three years comes in. Nersa announced last week that Eskom had been granted price increases of 24.8% on the average standard tariff from April 1 2010, followed by another average increase of 25.8 % from April 1 2011 and a further price increase of 25.9 % from April 1 2012.

This was less than Eskom asked for. In September last year, Eskom requested average annual price increases of 45% per annum over the MYPD2 period [the period from April 2010 to April 2013]; in November this was lowered to 35%.

The lower-than-requested increases were greeted positively by Nedbank's economic unit, which wrote "Nersa's decision to grant Eskom a 24,8% tariff increase this year is welcome news from an inflation perspective, although it will still contribute roughly 0.45 percentage points to inflation, in comparison with 0.65 percentage points had Eskom been granted a 35% increase. This decision also makes it less likely that inflation will breach the target band again this year."

Obviously, keeping a lid on inflation is important. If inflation does stay in the target range, the Reserve Bank will perhaps have some scope to lower interest rates this year, which would be great news for over-indebted and underpaid consumers.

Of course, some voices were less positive about Nersa's decision. Said Trade union Solidarity "The announcement by Nersa is a severe blow for job creation and investment in South Africa. Eskom and Nersa will be to blame for the consequent loss of several thousands of jobs."

This was echoed by the South Africa Chamber of Commerce and Industry (SACCI), which said "The increases matched general expectations from business but are still fairly high given current economic circumstances. SACCI estimates that approximately 250 000 jobs will be lost as a consequence."

So again, a bleak chord is struck for employment prospects. As noted earlier, we need sustained recovery in employment and consumer spending to get us safely out of the woods. Last week's news gives us reason to worry that we may not see this for some time to come.

Write to Felicity Duncan: felicity@moneyweb.co.za or follow her on Twitter at http://twitter.com/FelicityDuncan

*This article first appeared in Discovery Invest