THE latest Reserve Bank Quarterly Bullein (QB) provides a picture of the economy in the fourth quarter of last year which we can use to try and foretell the future. The one message that seems clear is that interest rates won't rise this week. Nor should they.
The Reserve Bank doesn't draw any conclusions from its figures provided in the QB with regard to interest rates. For that, we'll have to wait until Thursday's monetary policy committee (MPC) meeting. But there were some surprises, and one in particular suggests that the MPC shouldn't cut rates.
It seems, as Mark Twain wrote, that rumours of the death of the SA consumer have been greatly exaggerated. Looking at the spending side of the economy, the biggest surprise in the bulletin was the fact that there was an increase in household consumption expenditure in the fourth quarter of 2009.
Consumer spending had contracted at rates ranging between 1.5% and 5.8% for five consecutive quarters since the third quarter of 2008. But this losing streak was broken by a swell of 1.4% in the fourth quarter of 2009. (All percentage changes quoted are quarter-on-quarter, seasonally adjusted and annualised.) This came as a surprise to economists, who had expected another decline.
What was most interesting about the small rise in consumption was the role played by spending on durable goods. Real consumer spending on durables rose a whopping 15% in the fourth quarter. This is hardly the deep doldrums we've come to expect from consumer spending.
Exaggerations and distortions
However, before popping open the bubbly and toasting the fact that the consumer recession is over, it's important to note that I have painted a very skewed picture of the situation. That's the fun one can have with statistics; depending on how you calculate things and which figures you quote, you can make almost any argument.
The key point is that the Reserve Bank calculates percentage changes on a quarter-on-quarter, seasonally adjusted and annualised basis.
That's the way the bank looks at numbers, and no matter how confusing it may be to the ordinary person, that's how it will stay. But it does lead to exaggerations and distortions that must be taken note of to paint a more balanced picture.
The way in which the Reserve Bank calculates the figures is to project the change between two quarters forward as if it will continue for a full year. It does this every quarter. So, the figures that we use for comparison and policy forecasts are not year-on-year percentage changes, as people often think.
That 15% increase in spending on durable goods isn't the increase from the fourth quarter in 2008. It's the increase from the third quarter of 2009, projected forward over four quarters and adjusted for seasonal factors (such as Christmas spending).
This way of calculating changes means great care should be taken in interpreting Reserve Bank figures, as they tend to exaggerate the situation.
Year-on-year, there could still be a decline in spending, but quarter-on-quarter and annualised there's an increase. That is what's happened to household consumption expenditure.
No further rate cut on the cards
It's also important to note that an annualised growth rate of 1.4% is no great shakes. At the height of the consumer boom in 2006, consumption spending was growing at 8%.
Nevertheless, the key point is that household consumption spending growth has turned positive earlier than had been expected by most economists. This could be a flash in the pan, but current low interest rates suggest more consumers will come to the party. This is all the more so as latest employment figures show that job losses have come to an end.
No doubt Reserve Bank governor Gill Marcus would like to see a more sustained and robust recovery in consumer spending. But that doesn't mean that she should cut rates again to achieve that.
Interest rates work with a lag, and rates have already been cut by five percentage points. She won't want to repeat the mistake of her predecessor, Tito Mboweni, in cutting interest rates too deeply and sparking a boom that leads to another bust.
An important point is that consumers are highly indebted, and their indebtedness actually worsened slightly in the fourth quarter. Household sector debt relative to disposable income edged higher from 78.4% in the third quarter of 2009 to 79.8% in the fourth quarter.
The last time interest rates were this low, that ratio was somewhere between 50% and 60%. The greater indebtedness of households, and the fright they had when rates were hiked by 5.5 percentage points between 2006 and 2008, are likely to hold them back. We're not likely to see a repeat of the last consumer spending boom.