It's a recession. The whole world is either in recession or full blown depression. We are not as bad off as many other countries and a lot of this is due to the effects of the National Credit Act and the policy of inflation targeting. When the last gasp was being pushed into the bubble just before it burst, here in South Africa we were complaining that we were being punished by sky high interest rates. Now we are not anywhere as near as bad as we could have been if we had access to all that risky credit we were clamouring for. And inflation has been coming down all year, although it is still out of the target band at 8 percent. So what does this mean for you?
- Interest rates are linked to inflation
- Inflation drives food costs
- Your budget is shrinking
The effects of the global crash are somewhat less onerous here than elsewhere and there has been some positive economic data out. The leading indicators which measure expected market conditions in the future are swinging to the positive end of the spectrum which means that we can expect our downturn to be relatively short and not quite as painful as it could be. But prices are still going up even if nowhere near as fast as last year, and the drop in inflation of 0.4% is rather small, but positive. The thing with macro economics, stuff like inflation and interest rates, is that they take a long time to manifest. Aggressive interest rate cutting only started to brake inflation months after it was implemented, and many see it as a blunt tool. The government is not expected to change position on this however.
So it is expected that there will be one more rate cut tomorrow June 25 2009, of a guesstimated 50 basis points or half a percent. It is expected that this will be the last rate cut this year and should be all the stimulus that we need, but the time lag between implementation and effect means that it is very hard to call what the actual on the ground effect of these policies will be. Food prices which are a major factor in inflation are dependent on issues from last year's high interest rate environment and the extra costs are still being passed through to the consumer. At the end of the day it comes down to knowing what is in your budget and planning accordingly. If you can expect prices to rise on average by 8 percent then you can factor this in.