Economics Editor

LAST year was a bumper one for consumers, with interest rates dropping to 22-year lows, inflation decelerating close to zero and the rand's strength making overseas holidays and imported electronic goods much cheaper.

Unsurprisingly, consumers spent up a storm towards the end of last year, boosting output in the trade and services sectors, which helped cushion the blow from the manufacturing recession.

But will consumers continue to spend well into this year to lift the domestic economy?

There are no easy predictions, but today's release of the latest quarterly index of consumer confidence should provide some insight into consumer behaviour for coming months.

The index, compiled by the University of Stellenbosch's bureau for economic research and sponsored by First National Bank, surged strongly in the fourth quarter last year to one point, from minus 12 in the third quarter.

Last year's 5,5 percentage point rate cuts and a drop in inflation fuelled spending, especially on durable goods, such as furniture, cars, clothing and appliances.

While consumer spending is likely to remain firm in the first quarter, economists have warned that confidence could take a knock later this year as last year's slide in economic growth and rising job losses start to leave their mark on consumers' income.

Recent growth in retail sales has also been a good indicator of buoyant consumer demand. Retails sales were fairly strong last year, but accelerated sharply in the fourth quarter, rising more than 10% year-onyear in December.

Standard Bank economists said in a research report on Friday that the strength of retail sales was likely to continue in coming months, with its monthly trade activity survey suggesting a good start to the year for the trade sector.

"The still low inflationary and interest rate environment is likely to instil confidence in the consumer for a few more months," said Standard Bank.

"The inflation numbers from both the consumer and producer perspective have been supportive over the last year and have resulted in sales levels not seen for more than a decade."

The latest retail sales figures, which were scheduled for release this week, have been delayed by Statistics SA (Stats SA). A new release date has not yet been set.

There are also indications that strong consumer demand has started to filter through to the manufacturing sector, according to the latest Investec purchasing managers index, indicating a recovery in manufacturing production.

The index jumped to 57,9 points last month from 52,6 in February, boosted by a sharp rise in business activity, new sales orders and a build up of inventories.

This could signal a turnaround in the manufacturing sector that has been in recession for more than a year as weak global demand and the strong rand cut export growth.

Stats SA has delayed the announcement of January's manufacturing data after a low response to its survey, and is yet to set a new date for the data's release.

With no market-moving data expected this week, the rand is likely to be buoyed by international events, such as the dollar's weakness and surge in global commodity prices.

However, Wednesday's release of last month's gold and foreign exchange reserves figures is likely to hold some interest for the market, as it may indicate the pace at which the South African Reserve Bank has been buying dollars to build gross forex reserves.

Ryan Smith, an analyst at Standard Bank's corporate and investment banking division, said the Bank was likely to have built up reserves at a "considerable pace" last month, with the local currency's recent strength to R6,20 to the dollar linked to Anglo American's disposal of its 20% stake in Gold Fields "providing ample excess dollar liquidity for the (Bank) to absorb".

He said this may raise concerns that the Bank was trying to contain the rand's strength, although "policymakers have taken pains to clarify that this is not the motivation behind dollar purchases".

The rand was likely to be range- bound between R6,20 to R6,55 to the dollar this week, he said, but the gold price rally and the favourable interest rate differential between SA and the US was likely to boost the rand going forward.

JP Morgan economist Marisa Fassler estimated that the Bank purchased about $500m of the $1,16bn proceeds from the Anglo deal to add to forex reserves, pushing gross reserves up to $9,78bn.

Apr