Tighten your belt till 2009

South Africans are being advised to keep their belts well tightened until the second half of 2009 - that's when economists expect inflation, interest rates and household debt to decrease and a more positive economic climate to take over.

In other words, 2010 should be a year that can be celebrated for reasons other than hosting the World Cup in South Africa.

Earlier this week the Reserve Bank increased the repo rate by 50 basis points - pushing the bank lending rate to a near five-year high of 11,5 percent - and banks followed by increasing the prime interest rate to 15 percent.

There are also indications that further rate hikes are on the cards later in the year.

Cutting back on expenditure in order to cope is now essential, according to Cadiz African Harvest Assent Management's chief economist Adenaan Hardien.

The latest FNB/BER consumer confidence index has also revealed that consumer confidence fell by 10 points, from +22 in the fourth quarter of 2007 to +12 in the first quarter of 2008.

Consumer confidence is the lowest it has been in four years.

The rising interest rates, high food and oil prices, and house prices losing momentum are all contributing factors.

It is even likely that the country could find itself in recession, according to Citadel economist Dave Mohr - a scenario that Finance Minister Trevor Manuel has vehemently claimed will not happen.

Mohr argues that the economy has clearly been slowing since the middle of 2007, "with car sales declining and retail sales growth stalled".

"An analysis of the current state of the economy suggests that the local economy is vulnerable to a recession," Mohr said on Friday.

"Several of the typical causes of a recession are currently prevailing or could easily appear. We thus believe that the probability of a local recession currently exceeds 50 percent."

A recession describes an economy that is slowing down or is characterised by weakness in at least one major sector or a significant decline in overall economic activity that lasts for several months.

Mohr added that the global economy was currently in the grip of a slowdown, led by the US economy.

"Elsewhere in the developed world, growth rates are turning down as well, and, in a globalised world economy, emerging markets are unlikely to escape the effects of this slowdown."

Mohr does, however, believe that relief will come in 2009 or 2010 as households gradually cut down on spending and inflation is reduced.

Cees Bruggemans, chief economist at FNB, echoed Manuel's words and said a recession was not likely in South Africa.

"Our economy is still growing. and while some sectors are feeling the pinch, others are doing well."

The slowdown in sectors like real estate and household appliances and furniture should not be confused with a recession, as there are still other sectors like mining and agriculture which are much better off, he said.

The fact that interest rates have been hiked nine times since June 2006 meant that at some point they have to come down.

"The tide will change, and consumers could see light at the end of the tunnel within the next 12 months or so," Bruggemans said.

Although Hardien agrees that some sectors of the economy are experiencing a sharp decline, he has also ruled out a recession.

"We will see a sharp slowdown yes, but an overall recession is not likely."

He did, however, concede that things were bleak on the interest rate front and in a number of other areas, including employment opportunities and food and oil prices.

He said consumers should continue tightening their belts and then enjoy the notable relief that should come towards the end of next year.

  • This article was originally published on page 4 of The Star on April 12, 2008

Article from: www.thestar.co.za