An interest rate cut is not likely to give South Africa’s struggling economy a boost, a leading economist has predicted.
Nedbank senior economist, Nicky Weimar, who was giving an economic overview in Durban on Friday said that there was a 40 percent chance that the SA Reserve Bank would cut the interest rate at its next monetary policy meeting later this month.
Weimar said that while a rate cut would make credit cheaper for consumers, which would result in them spending more, it was unlikely to produce stronger growth in the economy.
Weimar explained that the strain and the weakness in the economy was on production and that lowering interest rates would not make a difference and grow the sector.
The economy needed growth to encourage companies to expand, she said, but at present, she added, “it was not firing on all engines”.
Growth was good from the point of view of domestic (consumer) spending and it was providing some momentum, but there was a serious drag from exports, said Weimar, which had not been the same since the recession.
Although the “vicious” recession was now a thing of the past, recovery had been extremely modest and there had been frustratingly low growth rates.
South Africa was consuming far more that it was producing, and spending more than it earned, she said, adding that finance from foreigners was needed.
The recent strikes and the industrial unrest were the worst since the anti-apartheid stayaways. Labour relations were at an all-time low and trust between the parties had dissolved.
The strikes had been illegal, extremely violent and long, resulting in loss of production and loss of exports.
South Africa had been “on a kind of holiday” while other countries focused on the worst areas of the world, she said.
Confrontation
But recent events in Marikana had changed that and the confrontation between the police and the striking workers had dented the image of the country abroad and people – including foreign investors – had started to look at South Africa.
The ANC’s elections next month would be the key to the future as people wanted to see certainty.
The ANC was able to turn things around at the conference, but if there was political rhetoric, radical views and disorder, “it would not go down well”, said Weimar.
Damage had been done; the country had already been downgraded by two credit rating agencies and the outlook was negative, she said.
A third rating agency, Fitch, was waiting to see what happened at the ANC conference before taking a stance. If it also gave a negative forecast, it would mean an “across the board” outlook, she said.
The ratings were a guide and a warning-to investors.
If they did not invest, the country would struggle to finance imports.
The rand would take the heat and there would be consequences for the entire economy.
The demand for exports was linked to the world economy, but things were looking a bit more encouraging for next year, she said.
Overall, the economy and employment levels would be steady, while wage growth would be slow.
But she also said that some retailers were forecasting a 10-15 percent increase in grain in the coming months which would hit consumers.