IT WILL GET WORSE BE­FORE IT GETS BET­TER

Financial Mail - Investors Monthly - - Opening Bell -

Un­cer­tainty seems to be creep­ing back into the South African econ­omy af­ter a rel­a­tively calmer first half of the year.

Em­ploy­ers and unions rep­re­sent­ing gold min­ers are not find­ing com­mon ground on an ap­pro­pri­ate wage set­tle­ment, which has led unions to de­clare a dis­pute. Work­ers will go on strike if a so­lu­tion is not found.

The ef­fect of a gold-sec­tor strike could be min­i­mal, given that the sec­tor ac­counts for a small share of gross do­mes­tic prod­uct (GDP). De­spite this, SA can­not af­ford a strike, even one in the gold sec­tor, as it would dis­rupt out­put and gold ex­ports.

All sec­tors need to pull to­gether and pro­duce, given the pres­sure on some of the key con­tribut­ing sec­tors to GDP, such as man­u­fac­tur­ing.

Man­u­fac­tur­ing en­tered re­ces­sion in the sec­ond quar­ter of this year, which will com­pro­mise its con­tri­bu­tion to growth.

Pro­duc­tion in man­u­fac­tur­ing was neg­a­tively af­fected by fac­tors such as dis­rup­tions to power sup­ply. Gov­ern­ment es­ti­mates that load-shed­ding will shave one per­cent­age point from GDP this year.

Econ­o­mists do not ex­pect stel­lar eco­nomic growth in the sec­ond quar­ter, with fore­casts rang­ing be­tween 0,5% and 1,3%. Eco­nomic growth slowed to 1,3% in the first quar­ter of 2015 from 4,1% in the fourth quar­ter of 2014.

Though eco­nomic growth is ex­pected to fal­ter in the sec­ond quar­ter, some good news is ex­pected for the cur­rent ac­count deficit af­ter re­cent move­ments in the trade bal­ance. Af­ter a se­ries of deficits, the trade bal­ance recorded a R5bn sur­plus in May and another of R5,8bn in June. This has led to ex­pec­ta­tions for the cur­rent ac­count short­fall to nar­row to around 3,5% of GDP from 4,8% in the first quar­ter.

The econ­omy is also likely to take some strain in the sec­ond half of the year from slower growth in con­sumer spend­ing, par­tic­u­larly be­cause of over-in­debt­ed­ness in an en­vi­ron­ment of ris­ing bor­row­ing costs and food prices.

The Re­serve Bank raised rates by 25 ba­sis points in July 2015 af­ter hav­ing left them on hold for al­most a year. While the ef­fect of a 25 ba­sis-points in­crease in rates on the pock­ets of con­sumers may be min­i­mal, the cu­mu­la­tive rise is more wor­ry­ing. Rates have gone up by a cu­mu­la­tive 100 ba­sis points be­tween Jan­uary 2014 and last month.

First Na­tional Bank cal­cu­la­tions es­ti­mate that the cu­mu­la­tive 100 ba­sis points in­crease means con­sumers with a R700 000 home loan taken over a 20-year pe­riod will pay R450 more per month, which in­creases to R643 if the house cost R1m.

Higher food prices will hit con­sumers as well, which will in turn add pres­sure on the abil­ity to spend. Though global food prices fell to six-year lows last month, the same is not the case for SA. A drought this year led to a lower maize crop, cre­at­ing the need to im­port this com­mod­ity.

Grain SA es­ti­mates SA will have to im­port 766 000 t of maize this year. The mod­er­a­tion in food in­fla­tion over the past year is likely to re­verse in com­ing months as food prices rise.

Head­line in­fla­tion has al­ready started an up­ward trend, which was one of the rea­sons the Re­serve Bank hiked rates last month. The Bank ex­pects in­fla­tion to be out­side the 3%-6% tar­get band in the first and sec­ond quar­ters of 2016 on fac­tors such as higher elec­tric­ity tar­iffs and as the ef­fect of a weak rand on do­mes­tic prices be­comes more pro­nounced.

With higher bor­row­ing costs

It is sur­pris­ing that the con­se­quences were not in­ves­ti­gated be­fore the im­ple­men­ta­tion of these new visa re­quire­ments

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