Improvements in general economic conditions and the economic growth rate in particular, continued in the second quarter of 2010. These developments have benefitted the Eastern Cape directly, as a higher growth rate was recorded locally compared to the country as a whole. An important indicator of the improved economic climate and outlook is new vehicle sales, which has grown significantly in the first quarter of this year. One of the Eastern Cape based vehicle manufacturers has been in a leading position regarding new car sales and captured 28 percent of total sales. The Eastern Cape also benefitted from a vibrant construction sector due to the development of the Coega and West Bank Industrial Development Zones, upgrades to  the transport infrastructure and general preparation for the FIFA Soccer World Cup Tournament. Despite the economy still being relatively weak and obviously recovering from a low base, earlier fears around the possibility of a “double dip” in the aftermath of the international financial crisis seem to be unfounded. Most indicators are clearly pointing towards recovery. The decline in employment has also slowed.

In a surprise move, the Reserve Bank’s Monetary Policy Committee (MPC) reduced the Repo Rate by 50 basis points to 6.5 percent on 25 March 2010. At the time, the annual increase in the Consumer Price Index (CPI) slowed down to 5.7 percent, which is within the target band of 3-6 percent.  The rate reduction was therefore intended to give a further boost to the weak economy, particularly in the light of private sector investment spending remaining low.   The lower interest rates, combined with a stable Rand/USDollar exchange rate, lower inflation and improving growth rate clearly provide a strong foundation for further improvements in the overall economic outlook. The World Cup is now only a month away. As it unfolds, updated economic indicators are expected to reflect further momentum in the upswing.

 The next MPC meeting is on Thursday 13 May 2010. With the huge increase in expenditure due to the World Cup, which may re-introduce some inflationary pressures, it is unlikely that the Repo Rate will be reduced further at this stage. On the contrary, many analysts see the current level as the lower turning point in the current interest rate cycle.  The outlook for the rest of 2010 is therefore for interest rates to remain at the current levels. In 2011, they may begin to rise.

While households currently benefit from the relatively low interest rate on home mortgage bonds and bank overdrafts, caution should prevail when considering an increase in borrowing.  Several studies indicate that the level of indebtedness of South African households is already alarmingly high. This, in fact, was one of the main causes of the international financial meltdown, which started in the US.  With the economic recovery ahead, however, savings instruments like fixed period deposits and investments directly in or linked to the share market are expected to produce growing returns going forward.

Prof Hugo Nel

Rhodes University