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Growth faces triple threat

Jun 15 2008 11:25AM

Sibongile Khumalo

Johannesburg - SA, the continent's economic powerhouse, is braced for a slowdown after a stretch of solid growth, as higher interest rates coupled with rising food and fuel costs are set to bite.

Growth in the first quarter measured 2.1% on a 12-month basis, down sharply from 5.3% in the last quarter of 2007, government statistics show.

The dip has been blamed on energy constraints which led to massive power cuts that forced mines and other industries to shut down.

The country's economy has been growing at an average of three percent since the end of apartheid in 1994 - a significant improvement from the meagre one percent yearly increase during whites-only rule.

But economists said Thursday's 50-basis-point increase of the key repo rate, bringing it to 12%, will hit economic growth and put further strain on consumers' pocketbooks.

"I believe the interest rates will remain high for most of the year," said T-Sec economist Mike Schussler.

Inflation

"Consumers are starting to tighten their belts and retail sales and vehicle sales are lower. House sales are slowing and prices are under pressure. These factors may contribute to a slowdown in the economy."

Banks have already announced that they will increase mortgage rates by 0.50% to 15.50%.

Interest rates began shooting up in June 2006 and have gone up nine times by a cumulative 450 basis points.

Central Bank Governor Tito Mboweni has maintained that raising interest rates is the right tool to meet the bank's inflation target of between three and six percent - a target not being met at present.

Consumers prices, measured by the consumer price index (CPI), leapt 10.4% on a 12-month basis in April and economists predict that inflation will not return to within the target range for about two years.

"The central cank has revised its own inflation forecasts, now expecting that CPI will peak at 12% later this year, returning to target by third quarter of 2010," said Standard Chartered Bank economist Razia Khan.

Power, fuel

"However these forecasts do not account for the possibility of a greater-than-inflation increase in electricity tariffs.

Although SA has backed away from an all-in-one go 53% hike in electricity prices, a sharp increase in electricity prices is nonetheless more probable than not."

With household debt at a record high 78% of disposable income, the majority of South Africans are likely to slump even further in debt, according to First National Bank (FNB) economist John Loos.

Add to that escalating food and oil prices, as well as electricity, education and medical costs, and the future does not look bright, added Loos.

Fuel costs reached new highs this month when petrol went up to R9.96 a litre and diesel to R11.

Commuters have been hardest hit by fuel prices, with bus and taxi fares also on the rise.

The impact is evident as well in the number of cars being repossessed by banks, with vehicle repossessions reportedly shooting up by 25% in the first two months of the year.

The Congress of South African Trade Unions (Cosatu), the country's largest trade union federation, has threatened protests over the escalating cost of living.

"Companies, especially small ones, will face crippling increases in their costs and thousands of jobs could be lost," said Cosatu in a statement