A step too far

ECONOMIC growth? What economic growth? The ordinary person could be forgiven for asking that question - in a despairing tone - despite the fact that SA has emerged from recession. For consumers, the recession continues.

This is clear from the gross domestic product (GDP) figures released on Tuesday, which showed that GDP in the retail sector was down 1.1%. This is the sixth successive quarter that retail sector GDP has shrunk.

A recession is defined as two consecutive quarters of negative growth. The retail sector has now been in a negative growth situation for a year-and-a-half. So, consumers would be forgiven for not sharing the good cheer that the release of the latest GDP figures generated in the markets.

It would be easy to blame the global meltdown for the recession in retail spending. But the start of the retail sector's woes predates the world's economic implosion.

True, the job insecurity brought about by the global economic crisis has worsened the situation. But the trigger factor for SA's retail sector recession was the hike in our interest rates.

Former Reserve Bank governor Tito Mboweni hiked interest rates by 5.5 percentage points from June 2006 to June 2008. There were many arguments in favour: at the time, consumer spending was booming and credit growth was going through the roof; imports were high and the resulting current account deficit weighed on people's minds; and it became evident that inflation would break through its target range.

Those who argued against hikes in interest rates (including myself!) usually pointed out that the main drivers of inflation were oil and food prices - both of which are set on international markets. Local interest rates would do nothing to affect those prices, we said.

Yo-yo effect

But this argument - that the central bank shouldn't respond to exogenous price shocks such as oil prices - only holds true when consumer demand is weak. Which it wasn't - I was wrong to argue against the early interest rate hikes.

They had to happen because when consumers are in the mood to splurge, it's easier for retailers to pass on price increases such as the petrol price to them. The Reserve Bank has to act to curb those "second round effects" from exogenous price shocks.

But the million dollar question is: where do you draw the line? At which point does sensible monetary policy become overkill?

It's clear from the length of the recession in retail spending that the Reserve Bank did indulge in overkill. The last hike of one percentage point in the prime rate to 15.5% in 2008 was a step too far. So, in looking at what and who is to blame for the recession in retail spending, it would be wrong to blame only the international economy. Our own Reserve Bank started it.

But, I hear you say, the bank has just cut interest rates by five percentage points since December 2008, almost completely reversing its previous increases. In doing so, bent over backwards to accommodate consumers. That's true, but at least part of the bank's dramatic cuts was the result of its own previous dramatic increases.

Credit bubble just made for bursting

But it's even more complicated than that. To get to the real root cause of the problem, we have to go back to 2004 and 2005. During those years, the Reserve Bank erred by cutting interest rates when it should have left them unchanged after cutting a lot in 2003. The bank - by cutting again in 2004 and 2005 - created a culture in which easy money was seen as a God-given right by a generation of consumers that went out on a spending binge.

The bank itself created the conditions for a credit bubble it later responded to. At first, vehemently - and then came the overkill.

Our interest rates have just been too volatile, with troughs too low and peaks too high.

It was overkill on the way down in 2004 and 2005, and overkill on the way up from 2006 to 2008. Now new governor Gill Marcus faces the possibility of overkill on the way down again if she cuts further.

Despite weak GDP growth and the continuing retail sector recession, keeping rates unchanged last week was the right decision. Rates are likely to stay unchanged for a while. My bet is that Marcus will take a long time before she starts raising rates again. But the timing of that decision is a very tricky one that faces central banks the world over.

Even though SA is out of recession, there's little to cheer about. The really important numbers are the job figures. Economic growth of 0.9% - though better than nothing - is definitely not going to create jobs.

And it's only once jobs are being created again that consumers will resume spending.

- Fin24.com