What you should know about SA’s economy this quarter
Monday, March 9th, 2015
Graph of the quarter
As we head towards the first monetary policy committee (MPC) meeting of 2015, the South African Reserve Bank (SARB) is faced with the dilemma of a fragile rand, weak economic growth and falling inflation due to soft global commodity prices. In fact, the real interest rate has actually turned positive for the first time since August 2011, reflecting that monetary policy has in effect become ‘less accommodative’. The SARB would like to cut interest rates in this environment, but risks sending the rand weaker versus the major currencies and will likely adopt a cautious approach to monetary policy as a result.
Key Macroeconomic Developments: Q4 2014
Q4 2014 was characterised by a sharp fall in the price of Brent crude, which led a broader moderation in global commodity prices. While this is clearly supportive for energy-importing nations, the sharp drop in prices indicates weak global economic growth, particularly in China, and a strong US dollar which is exposing fragility in many overvalued markets. There are numerous challenges for South Africa in this environment.
- CPI inflation slowed to 5,8% year-on-year (y/y) in November 2014 and 5,3% in December 2014, with global food and energy prices as the major drivers behind the domestic disinflation.
- Economic growth remained under pressure with manufacturing growth slowing to 2,3% y/y in October and contracting by 1,3% y/y in November.
- Mining also contracted in November, by 1,2% y/y, after posting meagre 0,6% y/y growth in October.
- Money supply growth has recovered slightly but credit conditions remain tight with limited space for a sustained cyclical recovery foreseen.
- Both the current account and the budget continued to print wide deficits, confirming the imbalanced nature of the SA economy and the susceptibility of the rand to outflows.
Business cycle and growth
Softening inflation and a slight uptick in credit growth has generated a degree of business cycle relief. We expect economic growth numbers to improve at the margin in Q1 2015 but this will prove unsustainable as structural growth conditions are poor
We view the recovery in vehicle sales as temporary, bringing merely short-term relief. Downside risks will remain into 2015.
Inflation and currency
Softening global commodity prices are set to continue forcing local CPI lower over the coming months. Growth is likely to remain constrained by Eskom power cuts and weak credit conditions. The SARB will consider lowering interest rates in this environment.
In spite of pushing into positive territory, low real SA interest rates continue to underpin the fragile rand. Unless the tighter dollar liquidity cycle changes trajectory in earnest, which is a low probability over the coming six months, the rand could remain elevated relative to the dollar in the first half of 2015.
Fuel price disinflation will provide much needed relief to the local consumer. Eskom’s power woes pose a caveat to this good news, however. Increased demand for fuel and actual outages could nullify the fuel price relief.
From December 2013 to March 2014 y/y growth in remuneration per employee has been lower than CPI inflation. This marks the longest period of sub-CPI inflation wage growth on record. Frustration within the public sector is surely growing, which will likely give rise to strike activity in the months ahead.
Corporate and productive health
Despite the notable recovery in domestic iron ore production, sales remain weak. Iron ore sales contracted 41% y/y in August (the softest growth since November 2009), 19,3% y/y in September and 14,8% y/y in October. This highlights the impact of weak global demand on the domestic economy. Softer commodity prices are unlikely to boost sales unless productivity can be enhanced sufficiently to offer discounts relative to global peers.