From Gareth Stokes, MoneyWeek editor,

Dear Money Morning Reader,

The governor of the Reserve Bank has one of those unfortunate “damned if you do – damned if you don’t” jobs. Every month – every second month during less turbulent economic times – Gill Marcus sits with the Monetary Policy Committee to decide whether interest rates are cut, hiked or left unchanged. At every turn she faces an onslaught from economic theorists and businessmen with differing ideologies. Right now, big business wants another rate cut. They believe the central bank hasn’t done enough to prop up the private sector postrecession. But economists urge caution. The governor cannot cut rates again – they warn – because of the looming threat of inflation. As the argument builds on either side, the governor might take the easy ‘no change’ route once again.  

Whatever the governor decides there are more pressing issues South Africa need address. We’ve been so blinded by the apparent success of the FIFA 2010 World Cup ™ that we’re missing warning signs from the ground floor. It’s easy to forget spiralling administered prices when the likes of Brazil, Spain and the Netherlands are entertaining you on a daily basis. It’s less easy to ignore the irrational behaviour of the country’s dominant trade unions. Their wage demands at Transnet and Eskom, already among the country’s top payers, is cause for concern. There are longterm consequences to their inflation-plus wage demands! 

Inflation concerns aside South Africa’s performance through recession is praiseworthy. As First National Bank (FNB) chief economist, Cees Bruggemans observes: Three years ago the country was in the grip of a massive ‘prosperity wave’, but you’ve since endured recession, political shenanigans, countrywide blackouts and an extremely Why there are more pressing issues than just rate cuts for SA uncertain international economic environment. Despite these challenges local consumers have risen to the challenge, with the latest FNB/BER consumer confidence survey confirming ongoing positive sentiment. 

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This consumer resurgence is great news if you’re invested in general retailers. Companies like Pick ‘n Pay, Massmart, Shoprite and Spar have shot the lights out in recent years, shrugging off recessionary forces and consistently growing earnings and dividends. Analysts suggest the cyclical retailers like Steinhoff and Lewis could be joining the recovery frenzy too. As the financial markets gain strength, says Bruggemans, consumer and business confidence should gain new cyclical highs through 2011-2012. The threats lie in the political and international arenas. Our regular readers know all about the sovereign debt crisis weighing down Europe at the moment. 

Europe matters to South Africa because it’s one of our most important regional trading partners. It purchases 32% of our exports and supplies 36% of total imports, second only to Asia! But there’s another statistic we cannot lose sight of – Europe accounts for 63% of total foreign investment in South Africa, unchanged since the 1990s. With the region on its knees we could suffer a massive decline in foreign investment at a time we most desperately need it. 

Should you be overly concerned? Standard Bank Economics doesn’t think so. They reckon despite renewed financial market risks you should see a strong global recovery, with larger European economies (the top 16) growing 4.7% in 2010 and 4.5% in 2011 compared to the 11.7% contraction in 2009. Will South Africa match this growth? Will we succumb to the debt concerns clouding prospects in the European Union? We’ll take a closer look at South Africa Inc in today’s feature article, on page 16.

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