Some bad news nestled in good

One of the problems with South African economics and, perhaps economics in general, is that what seems like good news can often include bad news. And vice versa. And sometimes both at the same time.

This is certainly the case with SA’s current account deficit, which, it was announced on Wednesday, had fallen unexpectedly steeply.

The Reserve Bank’s Quarterly Bulletin showed the deficit on the current account of the balance of payments fell to 1.7% of GDP in the fourth quarter of last year.

A current account deficit is recorded when the value of the goods and services a country imports exceeds the value of the goods and services it exports.

For 2016 as a whole, the deficit on the current account came in at 3.3%, down from 4.4% in 2015.

This is good news, exacerbated by its unexpectedness. Quarterly current account deficits of 1.7% or less were last seen the last time commodity prices rallied in 2010-11.

But nestled within the good news are some disturbing trends. One of the reasons for the improved balance is weak trade data, underpinned by lower imports that reflect weak consumer demand for imported goods.

The decline has prompted some recalibration of the predicted future figures for this year, and some economists now suggest that the current account deficit will continue to decline throughout 2017 and ultimately, could come in at about 2%. For the moment, however, the decline comes at a propitious moment. Normally a high current account deficit means SA is very dependent on inflows of foreign capital to finance the shortfall, making it vulnerable to volatile global market sentiment. Those inflows on the financial account of the balance of payments continued last year, but at a much lower level, sliding from 5% of GDP in 2015, to 3.8% in 2016.

Also on Wednesday, SA recorded another bit of bad news posing as good news. Statistics SA announced consumer price index inflation figures that showed inflation declining to 6.3% in February, from 6.6% in January. This was in line with market expectations and a noteworthy positive is that food inflation is now just under 10%.

Taken together, these two tallies suggest the recent trend of modest interest rate increases are likely to end and now, there is even some suggestion that they may be moving in the opposite direction.

Those hopes seem a little optimistic, though, because the Reserve Bank’s outlook is normally longer term, and the conditions for a lasting decline in inflation have yet to show themselves.

The trends do help explain why the rand, which has reached multiyear highs in recent weeks, has remained so strong. On the face of it, the rand’s recent strength is something of an anomaly, since the rise is taking place in the context of dollar strength. The widespread fear was that higher US interest rates could draw capital away from emerging markets in general, and SA in particular. But the US Federal Reserve’s moves have been slower than at almost any time in history. In 2015 and 2016, for example, it suggested it would raise interest rates four times. In fact, they were hiked only twice.

Ultimately, even though there are some disturbing trends within the good news this week, the global picture still looks better than it has for some time. As a small economy, SA is dependent on broad global growth to improve sentiment towards emerging markets and to hold up commodity prices. If SA can avoid more political own goals, it is possible that confidence will improve and investment will pick up.

In 2004, the DA won 12.4% of the vote and 50 parliamentary seats, not 38 seats and 9.6% of the vote as stated in yesterday’s editorial. Business Day regrets the error.

THE CONDITIONS FOR A LASTING DECLINE IN INFLATION HAVE YET TO SHOW THEMSELVES