Looking back at the past few years reminds me how tough it has been for households and businesses, which are dependent on the state of the economy. Since the pre-Covid-19 days the economy has hardly grown at all.
In the five-and-a-half years from the first quarter of 2019 to June 2024 GDP figures show that the economy grew a mere 5% (less than 1% a year). Households are spending only 6% more than they did then, and capital formation is down about 14% in real terms. How could such a deterioration be allowed to take place?
Clearly the supply side of the economy performed poorly — led by the well-documented, confidence-sapping failures of state-owned enterprises and government generally, including the provinces and municipalities.
However, demand management by the Reserve Bank was also responsible for at least some of the weakness. Much of the period since 2021 has been marked by high interest rates, absolutely and relatively to inflation. That is despite the grave weakness of demand for goods, services and labour.
The Bank’s monetary policy committee provides a full explanation for its interest rate setting. It has been fighting inflation, which rose after 2021 as the rand weakened significantly. The idea of a dual mandate of the kind applied to the US Federal Reserve — low inflation and employment growth being the combined objective of US monetary policy — has been anathema to our determined inflation fighters.
Shocks to the price level caused by exchange rate weakness — unrelated to immediate monetary policy settings and inflation trends — are clearly not ignored when interest rates are set. Yet such shocks, which are decidedly not of the Bank’s doing, lead inevitably to more inflation and then higher interest rates and in turn still weaker demand, which is already under pressure from higher prices. Higher prices have complex causes, but it inevitably affects the willingness to spend more given minimal growth in income.
Recovered well
The problem for SA and the Reserve Bank was that the rand weakened steadily after 2021, not only against the dollar but also compared with other emerging market and commodity currencies. The weakness was SA-specific in nature, clearly linked to the failures of government and the failure of the economy to grow.
The rand-dollar, average emerging market to-rand, and Australian dollar to-rand exchange rates recovered well from the Covid-19-linked risk aversion that put pressure on the rand and the market in SA bonds.
But SA appears particularly vulnerable to global risk aversion. For instance, the rand-dollar rate recovered to as little as R14 in early 2021. But then SA’s failure to realise economic growth overwhelmed the currency and bond markets and the weaker rand inevitably forced prices higher at a faster rate given the Bank’s modus operandi.
The connection between the foreign and domestic exchange value of the rand and the outlook for the SA economy has never been clearer. The government of national unity (GNU) has raised the prospects for growth and the rand and bond and equity markets have responded accordingly.
Inflation is on the way down — for the past three months it has averaged just 2.4% per annum. Interest rates at the short end of the market have also come down, and will come down further provided the rand holds up. Not so much versus the dollar, which may be in line for a Trump boost, but against the other currencies similarly affected by the dollar.
We should not expect the Reserve Bank to change its procyclical approach. However, we should insist and hope that the supply side weaknesses of the economy are properly addressed. Raising the GDP growth rate to a modest 3% per annum will not only promote economic and political stability but bring lower interest rates and less inflation.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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