There is a welcome spring in the SA economy’s step, as revealed modestly by the latest national income accounts, released this week. Second quarter GDP was estimated as 0.8% higher than in the first quarter, slightly ahead of consensus and about 1% up on the same quarter a year before. On a seasonally adjusted, annualised basis that is equivalent to 3.5% annual growth, which if sustained would be most surprising, and politically consequential given next year’s municipal elections.
Is faster growth such as this sustainable? Supply side reforms work gradually, but to immediately improve the economy’s performance there is a simple remedy that is easily implemented — to lower the cost and availability of credit for households and firms.
The effect of small declines in these costs may already be helping to advance household spending — the stronger growth in household spending to date was one of the GDP positives in the second quarter and perhaps beyond.
The seemingly obvious case for lower interest rates — given their present levels relative to sharply declining inflation rates and the slow growth in demand for and supply of bank credit by the private sector — is being strongly resisted by the SA Reserve Bank as part of its efforts to lower annual inflation to no more than 3%.
Will lowering interest rates be more inflationary should spending, and so growth rates, improve? That is, causing not only increases in the demand for, but also increases in the supply of, goods and services? I would suggest that SA consumer prices will depend on the behaviour of the rand, as inflation always does in SA. And so on the cost of imports and the prices of exports, which together play such an important role in our small, open economy.
In the second quarter exports and imports together were equal to 60% of GDP, with exports 6% higher than imports. Clearly, the exchange rate must matter a great deal for the path of prices in general, as it has so conspicuously influenced the direction of prices in SA recently.
The effect on prices facing consumers and firms along the supply chain, encouraged by stronger demand, would depend on the dollar and rand prices attached to these imports and exports — that is, on the exchange rate. Given a stable exchange rate, more growth, with more goods and services imported and less exported, becomes distinctly possible — without more inflation.
The feedback of faster growth and improved tax flows would also help improve the outlook for fiscal sustainability. The possibility of more growth with no more inflation, given rand stability, is surely a risk well worth taking. It is this vote-gaining possibility the finance minister is presumably pursuing in discussion with the Reserve Bank.
The surprising and most helpful of recent economic developments has been the strength of the rand, against the weaker dollar but also against most of our important trading partners, including China.
The post-Covid-19 rand weakness forced import prices higher, to a peak year-on-year inflation rate of almost 20% in early 2022. The increases in prices charged have rapidly fallen away since then, with the recovery of the rand, and have stabilised consumer inflation and the inflation of the prices of goods and services included in GDP.
So much so that GDP — measured in current prices — rose by only 2.5% in the second quarter, a mixed blessing because the much-watched ratio of debt to GDP has accordingly risen. We are not inflating away our debt problem — rather the opposite — to the apparent approval of the bond market.
Yet the lower realised rates of inflation have helped reduce expected inflation and the level of long-term interest rates. The yields on long-dated RSA bonds — both rand and dollar dominated — have moved smoothly lower, as they have for other emerging market borrowers, despite the volatility in the US Treasury bond market.
This has made for satisfactory returns for investors in long-dated emerging market debt, including SA’s. Yet the SA economy plays on the JSE have had to struggle on, given the interest rate-repressed weakness of demand for their goods and services. A little TLC from the Bank would make a large difference to their valuations and all who are dependent on the economy. And to SA politics.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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