The strong rand and high real interest rates have become scapegoats for corporate executives over the past two years. Yet the latest financial results covering 2003 into 2004 paint a surprisingly robust picture of the economy.
Companies such as Edcon and Barloworld have reported significantly higher profits and even the laggards in the IT sector are showing the first signs of a return to the black. The 550 basis point drop in interest rates last year did the trick and SA consumers are brimming with confidence.
There is no doubt that the strong rand has taken its toll on the increasingly export-orientated economy, particularly mining companies, but the blow has been somewhat softened by the Chinese-led boom in demand for commodities and by strong growth in the US and Japan.
What then does the next year hold for SA business? On the domestic front, consumer demand appears likely to remain firm, with inflation well within the Reserve Bank's 3%-6% target range. There are clearly some provisos - not least the impact of an oil price around US$40/barrel - but there is little prospect that the Reserve Bank could be forced into raising interest rates in the immediate future.
The first real statistical evidence of the firmer economy came with the release of first-quarter gross domestic product (GDP) figures in May. At 3,1% growth, the economy is still only half-way to the levels needed to make an impact on unemployment, but it is still well ahead of the meagre 1,3% achieved in the fourth quarter of 2003.
The Stats SA figures show that the contribution to growth came from most industry sectors, suggesting a recovery that is broad-based and not just reliant on two or three dominant sectors.
None of the key sectors, with the welcome exception of government services, reported growth of substantially less than 3% in the first quarter. Mining grew 3,5%, the retail and wholesale sector 3,3%, financial services 3,7%, transport and communication 5,9%, financial services 3,7% and construction a strong 6,6%.
What is most encouraging is that the manufacturing industry grew 2,7% in the first quarter, after it had contracted by 3,3% in the preceding three months. It does suggest, says African Harvest chief economist Adenaan Hardien, that the sector has adjusted to the stronger rand.
Most SA economists don't expect a significant weakening in the rand over the next year. The consensus forecast in Merrill Lynch's May survey of fund managers is about R7,50/US$.
Over the past 20 months the Reserve Bank has strengthened its forex reserves and eliminated the forward book, thus giving it extra ammunition to combat a sharp depreciation of the rand. Given the uncertainty about oil prices, the Bank will be even more determined to prevent an adverse impact on inflation from a weaker rand.
The consensus is that the domestic economy will continue to improve over the next two years. Moody's forecasts economic growth of 3,4% this year and 3,7% in 2005.
National treasury officials have also acknowledged that their estimate of 2,9% growth this year was too low.
Interest rates will probably remain at their current levels. Cash and bonds thus offer investors relatively poor returns over the short to medium term. Equities, particularly stocks that have a high domestic exposure, such as retailers and banks, should benefit from continued strong consumer demand.
