No relief for car sector

Johannesburg - Further interest rate cuts are unlikely to make a big difference to the fortunes of South Africa's ailing car sector, said an economist. This followed more calls from automotive industry representatives for a monetary policy stimulus.

"We have the hope and expectation that the Reserve Bank will implement a further rate cut," said Jeff Osborne, CEO of the Retail Motor Industry Organisation, after the release of motor trade sale numbers for August from Statistics SA on Thursday.

Sales for the three months to August 2009 fell 11.6% compared to the same period last year, which reaffirmed trends showing that the country's demand for cars had stabilised at low levels.

Industry representatives agree that a meaningful recovery in demand for new cars, which took a nosedive in late 2008, will take place in the first half of 2010. However, the industry insists that more interest rate easing is needed at this point.

Citi SA chief economist Jean-Francois Mercier said that the 50 basis-point cut, which may or may not happen later this year, is fairly insignificant in the greater scheme of things.

"The gradual 500 basis points decline we have had since December last year is enough. A further two basis points decrease may make a difference for them [motor industry], but that would have a destabilising effect on our economy," said Mercier.

'It will take years'

He added it would take a few years for the automotive market to return to levels seen in 2006.

The industry sold a record of 481 558 new passenger vehicles in 2006, according to the National Automotive Association of South Africa (Naamsa). The projected sales number of new passenger vehicles for 2009 is 275 000 units.

Mercier said the economy would need to experience structural recovery and real growth for the industry to bounce back to its 2006 high.

Lower interest rates may not be sufficient to pull the market out of the dumps.

Interest rates are now effectively at the same low levels they were in 2006. However, the structural characteristics of the economy have changed.

The National Credit Act was implemented in June 2007, which forced retail banks to apply stricter lending criteria. "Further inflation is a much bigger concern now than what it was back then. Households also have much higher levels of debt," said Mercier.

An example of structural change in the economy would involve real economic growth leading to urbanisation, which would in turn increase demand for cars.

- Fin24.com