2015 Q2: The state of the economy in nine graphs
Tuesday, May 19th, 2015
By Rob Price, Market Analyst: ETM Analytics
Graph of the quarter
A divergence has emerged between household credit growth and household money supply, where credit has slowed while deposit balances have risen. This trend is indicative of conservative balance sheet activity and low household confidence and generates a negative outlook for retail activity over the coming months. Also bear in mind that slow credit growth and rising cash balance prepare household balance sheets for the forthcoming cycle, but the turning point for the household credit cycle doesn’t appear near – domestic economic policy needs to generate greater certainty first.
Key macroeconomic developments: Q2 2015
The SARB was more hawkish than expected in March after renewed inflation pressures stemming from food prices, fuel levies, labour costs and higher than anticipated electricity tariff hikes. These factors combined with severe tax hikes announced by the National Treasury at the February budget are a major constraint on economic growth. As a result we expect any business cycle relief to be short-lived within the context of a secular stagnation in economic growth due to the on-going policy malaise.
- CPI inflation slowed to a four-year low of 3,9% y/y in February, largely due to a further fall in transport prices, while food inflation eased further. PPI fell to 2,6% y/y from 3,5% y/y in January.
- SA’s current account shortfall narrowed to R198bn in Q4 from a R223bn deficit in Q3. A compression was noted in the trade deficit too.
- Mining posted the third month of y/y growth in February after contracting 2,3% y/y in January. Manufacturing posted another 0,5% y/y contraction in February after a 2,4% y/y contraction in January – the softest print in six months.
- The trade deficit narrowed from a record R24,2bn gap to R8,5bn in February, partly owing to seasonalities. The cumulative gap at R32,7bn is more than double the R15,5bn in the first two months of 2014.
- Retail sales growth eased to 1,7% y/y off a downwardly revised 2,0% y/y (prev. 3,4%) in December.
Business cycle and growth
It is worth noting that the ETM Business Cycle Index rose to the highest level since Q1 2008 in March. The index will likely enter into a stabilisation phase in Q2, affirming a soft cyclical recovery.
While muted, money supply growth is providing cyclical relief in the near term, particularly in the higher income portions of the economy.
The SARB is allowing rising real interest rates to conduct a degree of interest rate “normalisation”. The rand remains the outside risk and likely driver of a higher repo rate in H2 2015.
In terms of inflation developments, there are a number of factors which suggest that the current moderation in CPI to a four-year low of 3.9% in February won’t be sustained in the coming months. These risks stem from food price risks on the back of local droughts, above-CPI wage settlements, higher fuel and Road Accident Fund (RAF) levies, and electricity tariff hikes. (For a detailed treatment of the myths surrounding so-called “wage–price spirals”, see the October–December 2014 issue of this report.) This view was affirmed by the SARB, which at its March MPC meeting indicated that SA CPI is at the bottom of its cycle.
In terms of labour market dynamics, a particularly difficult period of government wage negotiations is expected, which will result in either low wage growth and strike activity or high wage growth and limited headcount or a combination of both. The Solidarity-ETM Labour Market Index, which considers labour affordability and employee confidence, is therefore likely to remain relatively low and employment growth prospects are thus unfavourable.
Corporate and productive health
The local trade data confirms that global economic growth remains a headwind after exports declined for a second consecutive month in February (exports to Asia are particularly pressured). Mining companies are hardest hit in the midst of sharply lower commodity prices and a slowdown in China.
Labour unrest threatens to remain a feature in SA in 2015, which is likely to place further strain on SA companies. The third highest number of workdays lost since 1994 (owing to strike action) occurred in 2014. With public sector wage negotiations making little progress and strike risk elevated, 2015 could compete for top 3 honours over the coming quarters.