Ayanda Shezi and Kevin O’Grady

SA’s six-year economic boom is set to falter, and government must urgently address a range of "substantive economic issues" to avoid an acute reversal of fortune, according to SA’s largest business organisation.

The warning from the South African Chamber of Business (Sacob) comes amid worrying signs of wavering consumer demand — the very basis of SA’s strong economic performance.

Growth in retail sales slowed to its lowest level in almost two years in July, growth in house prices has halved in a year and new car sales are coming down.

At the same time, inflation is climbing as fuel prices reach new highs, and economists surveyed for the latest Reuters Econometer now expect a full percentage-point increase in interest rates next year to combat it. This would come as a heavy blow to households that are more in debt than they have been in nearly a decade.

Continuing to rely on the demand side of the economy for growth under these conditions, at the expense of important issues hampering the supply side, was a recipe for trouble, Sacob said as it released its business confidence index (BCI) for September.

The BCI slipped to an eight-month low of 125,9 last month, five points below last September’s record high of 130,9.

Sacob economist Richard Downing said a peak in the business cycle "or some sluggish economic activity" usually followed 12-15 months after an upper turning point in the index, suggesting an imminent end to the longest economic upswing since 1945.

There were strong signs that the favourable financial conditions of the past few years — a strong rand, low inflation and falling interest rates — were "peaking and cyclically heading for a downturn", Downing said.

Rather than taking action to "artificially prolong the present upward phase of the business cycle, this may be an opportunity to place greater emphasis on substantive economic issues".

"How seriously and consistently these issues are addressed will be critical for business confidence in general and investor confidence in particular, " he said.

Government seemed to have "sensed the need" to address these issues by appointing a top-level team to find ways of achieving sustainable growth of 6% a year, but correcting them in the medium term would pose "tremendous challenges", Downing said.

The main issues government needed to address were:

The increasing tax burden, which has gone from 24,8% of gross domestic product (GDP) in 2000 to 28% in the first half of this year, contributing to yet another major growth constraint — SA’s "dismal domestic savings ratio of just more than 13% of GDP";

Faltering public infrastructure brought about by the "overriding emphasis on social needs and transformation", which has "diverted attention from a deteriorating asset base and depleting capital stock"; and

Insufficient foreign capital to supplement SA’s existing woeful levels of investment spending. "Substantially larger foreign capital inflows (about 15% of GDP on a continuous basis) are essential to not only cover the current account deficit but also provide capital for fixed investment purposes," Downing said.

"A consistent, reliable and predictable policy environment that enhances investor confidence and provides more substance to the longer-term goals of the economy is an urgent priority."

Meanwhile, the Reuters Econometer for last month, released yesterday, was largely unchanged as rising price pressures heightened expectations of interest-rate hikes next year.

The Econometer, which is compiled from a survey of 14 economists, was at 262,87 points from August’s 262,26.