SA Growth & Inflation2016-10-25 It is an odd couple, SA growth & inflation. The one distinctly down next year, the other really not going anywhere except at the decimal-point level, provided we stay lucky (never a given). And SARB in the role of the unwilling bride… The 3Q16 is going to be unimpressive growth-wise after an explosive catchup in the 2Q16 being mostly a base period recovery effect. Looking through it, the 2Q16 wasn't all that impressive. Only a depressed base helped. But this is no longer the case in the 3Q16. Firstly, mining, manufacturing and retail in July-August are down on the comparative period of 2Q16, suggesting a modest decline in the quarter’s output. And motor trade and the building trades. But the year-on-year comparisons also are mediocre, indicative that growth barely scrapes along. Still, the economy is advancing, however slowly it may be. It suggests ruling out recession (two successive quarters of GDP decline). Instead this sideways shuffle. How to get growth up beyond 1% next year is a challenge, bearing in mind that on the demand side of the economy the public sector is constrained (we may assume budget-wise?). The household sector is similarly constrained. For job growth was earlier this year still positive year-on-year, but we could easily encounter a falloff in 2H16. Credit growth is constrained to low single-digits, partly through higher rates but most effective through tightened regulatory strictures of the most demanding kind, for motor deals, housing mortgages, retail credit, ordinary credit access. And business suffers the deepest blues, going by confidence indices, their strategic plans all seem offshore, and local fixed investment commitments minimal (except in energy and computing). Yet not all is lost. There is the presumption of a more normal agricultural year (and it has started to rain in the summer rainfall region, if so far not very impressively). After the deep output falls of the past year, there potentially awaits a rebound these next two years (recovery tends to take time). Global commodity demand seems to be stabilizing (implying some upside?). Electricity supply has improved and with it stability, with possibly some heavy electricity users coming back into the game (difficult to read). These two sources may be most uncertain. Households could benefit from an inflation reversal, shortly still to peak (rising to 6.1% in August, not as high as expected, and still to rise in coming months, but not as high as SARB only recently still expected at 6.7%), and thereafter plunging in the course of next year, with food inflation especially year-on-year expected to be coming off. If there is no drought continuation into 2017, political SA risk doesn't suddenly rears its head sinking the Rand and the US economy stays meek & the Fed cool in its minimal rate rising, SA inflation next year could easily reach 5% (as opposed to reaching high single digits). Such an inflation falloff will likely boost real income gains of households, with these the most pronounced among lower incomes due to the food impact. That could imply a retail and consumption recovery, even if not a very strong one. But enough to reinforce the decimal-point GDP growth recovery to 1% or better. That doesn't suggest recession shortly. Instead, we will probably keep skimming the zero growth line, with some slight upward potential into next year, assuming nothing big & bad sinks us. And this at a time inflation subsides anew into the 3%-6% target zone, and could actually sink quite low before stabilising near 5%. Would this tempt the SARB into rate cutting? SARB has shown todate a near pathological anxiety about global risk surprises adversely affecting our foreign capital flows, badly hitting the Rand and this feeding through into higher inflation, with our semi-rigid pricing framework potentially worsening the inflation effects. In addition, we continue to have a labour force making substantial wage and benefits demands, certainly in elite Union corners, but projected from there much wider through institutional arrangements. And our political environment remains uncertain, potentially giving way yo patronage networks, inviting expansionary fiscal policies and generally implying less discipline, potentially fanning inflation. And this also jeopardizing our credit rating and the demands by foreign creditors on what risk premiums we pay, and the pressure put on our financial system? So SARB has much to worry about even if short-term inflation were to fall away. A reason to allow real interest rates to rise some more (reducing our external capital flow exposure as global yield considerations change?). This continues to deny the potential for rate cuts. And this before considering the SARB Governor’s New York sentiments in early October of remaining on a rising rate trajectory (but also raising the issue of whether he was playing to his audience?). Comments since then focus on the bar being high for rate cuts (despite imminent inflation collapse) but this merely highlights how risk anxiety remains front and centre in SARB calculations. Minimal growth lift, considerable inflation falloff, a stagnating SARB rate policy. And a volatile Rand (not discussed but still thrown in the hat in the 13-16:$ range) in 2017. It could of course have been considerably worse (thinking recession, even higher inflation peaking, Rand at new lows, SARB unforgiving with rate increases). But if new crises don't derail us, the better prospect could prevail. Of course, we say this every year, and 2017 still appearing rather challenging…
Cees Bruggemans |
