BRIEF ANALYSIS

The silent prayers for the SARB to ease interest rates were answered late last month when the repo rate fell from 5.5% to 5%. The excitement, however, was short-lived as higher international crude prices spoiled the broil for consumers, the price of 95 Octane Petrol went up 22 cents per litre the very next week.

On the one hand a drop in interest rates hurts net savers (particularly Pensioners) whose continued livelihood is dependent on higher interest rates. Arguably, lower interest rates will encourage more investment, resumption of expenditure on durable consumer goods and replacement of ageing personal assets (Motorcars). Personally, I think 50 basis points won’t do much to excite or elicit much of a response from many investors or consumers.

More concerning however, is evidence of a general slowdown in the global economy. Europe is still messed up (fundamentally and structurally), worsening as Spain joins the growing list of bailout (handout) seekers. Chinese growth is slowing dramatically having dropped spectacularly from a high of 14% in pre-recession 2007 to about 8% in stagnating 2012. Consumers in the US earned higher incomes (0.5%) in June and yet spent about the same dollars as in May, meaning they may have switched to saving (now at 4.4%).

This has culminated into a narrower trade deficit of R5.7bn from R8.9bn in May. Before you do the dooggie dance in celebration, consider this; the deficit is down not so much because of improved terms of trade, rather, the slowdown is attributable to a reduction in both imports and exports. This means overall trade was lower on a global scale. That we imported less indicates falling levels of domestic demand, but that we exported less suggests tamed international demand. (I predicted this in the May analysis)

On a positive front, however, official unemployment (which doesn’t mean much) eased to 24.9% from 25.2% Stats SA reported. Thanks to resumption of construction expenditure by Government, more people are finding work. Given that South Africa is expected to be one large construction site for at-least 20 years, one would hope that more and more people will find work in construction and related sectors.

My advice to you is to tuck in and button down, reduce your debt as quickly as possible and look for defensive investment opportunities. The global economy is in a tailspin and will remain in the vortex for outside of 18 months, brace!