Economics Correspondent

THE consumer spending boom fuelled by last year's interest rates cuts could run out of steam sooner rather than later this year, as falling production and rising unemployment in the economy damp consumer sentiment.

A slump in consumer demand, coupled with a slowdown in fixed investment from the private sector, could result in gross domestic product (GDP) rising only 2,1% this year, says Merrill Lynch economist Nazmeera Moola.

This is only marginally better than last year's 1,9% growth , but worse than government's growth forecast of 2,9%.

Moola said the lag between last year's interest rate cuts and a pickup in consumer spending was far shorter than the nine- to 15-month lag in previous rate-cutting cycles. This could result in a drop in spending by the second half of the year.

The rapid rise in consumer spending could be attributed to "healthier consumer balance sheets", said Moola, since a relatively low consumer debt service ratio of 8% last year required a reduced adjustment period.

"As a result, borrowing picked up very quickly," she said. "And since the positive impact of the interest rate cut was felt much quickly, it could also wear off more quickly. "

The Reserve Bank has yet to publish consumer demand figures for the last quarter, but evidence from motor vehicle and retail sales as well as the latest private sector credit demand figures reveal very positive spending conditions.

They also suggest an acceleration in consumer demand last quarter, from 4% in the third quarter.

The Bank's monetary policy committee last month warned that the rapid acceleration in consumer demand was an inflation risk, and that the full effect of last year's 5,5 percentage points interest rate relief would be felt in the economy only during the course of the year.

However, with consumer spending tapering off after June and growth in private sector fixed investment likely to decelerate due to low profitability levels, the outlook for economic growth was staid.

Moola said rising unemployment, muted tax cuts and declining profits would all work against domestic demand conditions this year.

She estimates private sector fixed investment would grow 3,1%, down from last year's 6,1% growth, as fixed investment projects are shelved because of declining profits.

Fear s of a rate hike before the end of the year could also put a damper on spending, along with rising unemployment, said Nedcor chief economist Dennis Dykes.

However, a recovery in export growth would salvage economic growth. Consumer spending had not achieved this, since most of the money had been spent on imports.

"However, (SA's) external position should improve, as commodity prices increase and global growth strengthens. The only thing holding us back is the strong rand. "

GDP was likely to grow 2,8% this year, based on "reasonable consumer demand, moderate fixed investment and a pickup in export volumes", he said.

The national treasury has based its 2,9% growth forecast on a recovery in exports, which it expects will rise 5,1% this year due to faster world growth and a mildly weaker exchange rate compared with last year's decline of 2,4%.

However, despite the rand's initial weakness at the beginning of the year, it has strengthened again, boosted by bearish sentiment towards the dollar.

On a trade-weighted basis, which compares the rand's value to a basket of currencies, the rand has gained 14,6% since the beginning of the year. With I-Net Bridge

Mar 09 2004 07:43:17:000AM Nasreen Seria Business Day 1st Edition