Date: 22/10/2015

Published by: Bornapart Sibanda

Economic Indicators: What do they mean to

your business?
Most of us are familiar with the South African Reserve Bank (SARB)
Governor, Lesetja Kganyago; and the Finance Minister, Nhlanhla Nene.
Any presentation made by these two can hardly be complete without a
mention of inflation, Gross Domestic Product (GDP), or the exchange
rate. While what they say may have the potential to decide the fate of
a business, few business owners and managers understand it. Improved
and informed business decision making and planning are a function of a
broad understanding of the complex economic environment in which a
business operates. The Consumer Price Index (CPI), GDP and Exchange
rates are only but three of many economic indicators whose movement
has the potential of negatively or positively affecting any business. As
such, an entity may ignore these at its own peril.
The GDP is an important indicator of the health of an economy. It
measures the monetary value of goods and services produced by a
country during a particular year. The GDP figures are calculated and
presented by the SARB every quarter. The GDP growth rate point out
whether the economy is stable, expanding or shrinking. A rise in GDP
means that the countrys economy is growing. Such a rise is
characterized by growing income levels of citizens. And a higher
consumer spending on goods and services.
However, a decline of GDP growth for two consecutive quarters suggest
that a country has fallen into a recession period. Such a period is
characterized by unemployment, and a decline in consumer spending.
One would however be glad to know that the South African economy

expanded by 2.1 percent year-on-year in the first three months of 2015,

up from 1.3 percent during the previous period.
Apart from GDP, one of the familiar economic indicators is the CPI, a
measure of the rate of inflation. The CPI is sometimes viewed as an
indicator of the effectiveness of the governments economic policy. As
such, South Africa has an inflation target framework which was
introduced during year 2000: a monetary policy framework in which the
central bank announces an explicit inflation target and implements
policies that are aimed at achieving it. The SARBs inflation target is
currently an inflation rate of between 3% and 6%.
What is inflation after all? Its a rise in the general level of prices. If the
CPI is rising faster than the average wages of employees, the purchasing
power of consumers decline, and consequently, business revenue. During
periods of rising inflation rate, businesses face pressure of raising salaries
and wages. If that is done, production costs may escalate, leading to a
vicious circle of price increases.
The opposite of inflation is deflation, which is a decline in the rate of
inflation. Deflation occurs when the inflation rate falls below 0% (a
negative inflation rate). This should not be confused with disinflation,
which is a slow-down in the inflation rate. Deflation increases the real
value of money, and the real value of debts, and as such, makes it more
difficult for businesses and consumers to meet their debt repayment
obligations.
Furthermore, a fall in prices of goods and services as a result of deflation
incentivizes consumers to delay purchases and consumption until prices
fall further, an action which reduces overall economic activity.
So frequently, we hear of the performance of the rand against other
currencies. For some, it doesnt matter whether this performance is
negative or positive, with or without it, it is business as usual. Well, for

others, the continued existence of the business is directly tied to this:

the exchange rate.
An exchange rate is the value of a nation's currency in terms of another
currency. In the case of companies that import or export products, the
exchange rate is a key economic indicator that should not escape their
attention. When one starts to require less and less of rands to buy
another currency, such as the United States dollar, the rand is said to be
appreciating, thus gaining value relative to other currencies. For
importers, this is worth smiling about as it means that each rand enables
them to buy more of another countrys product, for resale or as input to
their production process.
While importers jubilantly respond to the news about the appreciation
of the rand, a distress signal permeates exporters: their exports would
be considered as expensive by other countries, as the customers of those
currencies would need more of their currency to buy the same quantity
of imports.
Turning the tables, when a currency loses value (depreciates), a joyful
noise could be heard from exporters. It means that customers in foreign
countries can buy the same quantities of the products, using less of their
currency; and therefore, can afford to buy more for the same amount.
This means increased revenue to the exporting entity. As for importers,
they would now need more to buy the same quantities of products or
inputs from foreign countries, a phenomenon that may force them to
increase their domestic prices, and risk a decline in sales.
Next time, when you hear of the exchange rate moving from $1: R11 to
$1: R13, know that the rand is depreciating, as it means that it now costs
R2 more to buy a $1 product from a country that uses the US$, bad news
to importers. In the case of exporters, it means that customers in foreign
countries can sell their $1 for R13, and still use the R11 to buy the same
quantity of exports. To them, the product is R2 cheaper. To exporters,

more can now be parceled out of the country as the targeted markets
would have an extra R2 rand to spare; meaning, increased sales!