I ALWAYS look on the bright side of life. That song, made famous by British satirists Monty Python, wasn't meant seriously. But the Reserve Bank is going to have to take those words in earnest if it wants to motivate keeping interest rates unchanged this week.
Most economists don't expect the Reserve Bank to cut rates again, after keeping them unchanged at the last monetary policy committee (MPC) meeting in June. The prime overdraft rate is currently 11% after 4.5 percentage points of interest rate cuts.
Globally, the monetary policy focus is on growth and not inflation. But our Reserve Bank appears to have shifted the focus back onto inflation and away from growth, which had been the main concern between December and May.
The Reserve Bank's move may be motivated by a perception of "green shoots" sprouting in the SA economy. The MPC will need the statistics to back up this view. But, luckily for the bank, that old adage will come in handy: "If you torture the data enough, it will eventually confess!"
So, anyone looking for green shoots in last week's motor vehicle sales figures can point to the fact that total units sold have shown an uptick on a month-on-month basis. This was widely under-reported in the doom and gloom that surrounded last week's reports on July vehicle sales.
Green shoots or pie in the sky?
An additional factor that may have placed the overall figures in a less favourable light was the fact that, from July, Chery and Foton sales were not included in the National Association of Automobile Manufacturers of SA (Naamsa) analysis. These two factors - one could argue - suggest that a turning point has been reached for consumer spending on durable goods. Whether that amounts to green shoots depends on one's definition of that overused cliché.
Then there's this week's manufacturing production statistics, which showed a month-on-month rise for the second consecutive month. Statistics SA figures show an increase of 0.1% in June after 0.8% in May in manufacturing output. Again, one could argue that a turning point has been reached.
Also, possibly showing the first tentative signs of stabilisation after steep falls are retail sales, which rose in real terms between April and May. The next set of figures will become available this week and will be closely watched.
The sad truth is that these examples of so-called green shoots are overshadowed by two other sets of data. The one is the Kagiso Purchasing Managers' Index (PMI) for July, a leading indicator for the manufacturing industry. The PMI's fall in July suggests that it's too soon to call a bottom to the carnage in the manufacturing industry.
The other set of figures which has dropped alarmingly low and could fall even further is growth in credit extension. Reserve Bank figures show that growth in private sector credit extension (PSCE) fell to only 4% in June, with PSCE rising a miniscule 0,2% month-on-month in May.
Economy still deep in doldrums
After a long period when credit demand had seemed to remain stubbornly high, these figures have now fallen off a cliff. In real terms, credit extension is shrinking. One has to ask the question, as former finance minister Trevor Manuel did in his February budget, whether credit extension growth isn't falling too fast. (When Manuel made his comment, credit growth was appreciably higher than it is now.) Some economists predict further shrinkage in the credit growth number.
Using the retail sales figures to assess consumer demand is difficult, because the figures are months out of date. Not so the credit figures, which suggest consumer spending is still very weak.
No matter how much one tortures the data, one can't escape the fact that the SA economy is still deep in the doldrums. At best, there are tentative signs of turning points.
But, unfortunately, inflation is unlikely to go below the target for any period of time before next year. Concern about inflation has been aggravated by high wage settlements. It would be difficult for the Reserve Bank to argue that the outlook for inflation has improved since the last MPC meeting - when it kept rates unchanged.
Still, earlier in 2009 the bank had its focus firmly on growth, with inflation seen as less of a concern. It needs to return its focus to growth, and cut interest rates by 50 basis points this week. Even though the bank targets inflation, it has shown flexibility in the past, and needs to do so again now.
- Fin24.com