No time to hike interest rates

David Shapiro: I often claim one can get a greater understanding of the state of the economy from businesses that connect daily with customers and suppliers than from spreadsheet analysts and politicians perched in penthouse offices far from the factory floor.

In the past few weeks, many JSE-listed companies have released interim or final earnings information. Ignoring a handful of really outstanding performances, most of the reports demonstrate that the economy is sputtering along.

Against a backdrop of uncertainty in the rest of the world and escalating input costs back home, the horizon is still murky.

Hardest hit has been construction, the sector that buttressed our economy in the darkness after the Lehman Brothers collapse in September 2008 and the ensuing global financial crisis. Suffering from a World Cup hangover, construction and building groups lean heavily on the government's R1-trillion infrastructure programmes to help revive their fortunes.

Tough trading conditions, contract cancellations and delays in awarding state contracts have sent profits plunging and management hunting offshore for growth.

Share prices of the hordes of companies that cashed in on the listing boom five years ago have hit rock bottom. Until there is unmistakable evidence of conditions in building and construction normalising, it pays to venture elsewhere for returns. Unfortunately, many other enterprises whose fortunes are inextricably linked to these industries, like steel fabricators, cable makers and cement producers, also suffered hardship.

It's not all doom and gloom for contractors though. Barloworld, which supplies heavy equipment to mines, produced sizzling half-year results, characterising the lively pace of mining expansion in southern Africa. Barloworld is one of a handful of businesses that expects profit growth to continue, though that is probably true of many peripheral companies supplying chemicals, explosives, consumables and other services to mines.

The mining industry remains the cornerstone of the economy. The country's producers are basking in the glow of near record high commodity prices, the outcome of a depreciating US dollar and bulging demand for materials from developing nations like China and India.

Yet mining's contribution to the country's GDP is nowhere near where it should be. Over the past decade, output has lagged development in other producer nations and slipped in relation to local manufacturing and financial services.

Analysts blame the government's empowerment imperatives and looming threat of nationalisation as a major impediment to growth, while an overpriced currency, repeated strike action, decaying infrastructure, power shortages and rising administrative expenses cut deeply into margins, leaving little capital for expansion.

Even setting aside this foreboding catalogue of headaches for management to tackle, most of the heavyweight companies are paying their way, rewarding shareholders with increasing dividends and healthy returns.

If we're handing out tributes, then the top honours go to our retail sector where teams from corporations like Mr Price, Clicks and Lewis have excelled beyond the call of duty. Acknowledging that interest rates are low, real wages are on the increase and consumers are feeling more confident, it hardly accounts for the skills of the people at the top and their ability to pass their energies down to the staff manning the tills. The shares may be rich, but that's the price you pay for quality.

My enthusiasm may be short-lived, though. Almost without exception, retailers warn of difficult trading conditions ahead. They expect consumer spend to ease, their wallets hit by additional outlays for electricity, fuel and food.

If you are looking for exciting growth, you can't ignore the achievements of the new banking boys on the block, Capitec and Abil, whose simple, low-cost products are biting hard into the bottom-end customer bases of the Big Four.

Nor can we overlook the multiplying number of individuals who now qualify for health insurance and are pushing up traffic at private hospital groups like Medi-Clinic, Netcare and Life Health Care.

Considering the harsh global economic environment, our private sector has coped commendably. Still, examining the prospects statements that accompany published results, managers of most of our large corporates remain extremely guarded about the profit outlook. And while rising fuel and food prices trouble the authorities, hiking interest rates to stabilise prices would at this point surely rattle business confidence and send the economy backwards.