The Reserve Bank may implement one more rate hike in 2016 against the two or three that were expected earlier in the year
Following the contraction of SA’s economy in the first quarter of 2016, there has been nervous scrutiny of incoming data to indicate second-quarter performance.
Indications so far are that SA may have barely avoided a technical recession (two consecutive quarters of economic contraction).
Though more data must still be released for a definite answer on the second quarter’s performance, figures for manufacturing production and retail have painted a slightly better picture for the period against the 1.2% contraction in the first quarter.
Manufacturing surprised on the upside, increasing by 4% y/y in May from 3.1% in April. Retail sales also beat expectations by increasing by 4.5% y/y in May against a 1.6% rise in April.
Manufacturing Circle executive director Philippa Rodseth says there is “certainly hope” that manufacturing was a positive contributor to GDP in the second quarter. Manufacturing Circle is a body representing most local producers.
“The manufacturing production growth figures are possibly an early indication that the weakened exchange rate is starting to benefit our manufacturers through export-led growth,” Rodseth says.
A leading indicator of activity in the manufacturing sector — the Barclays purchasing managers’ index — has been improving, which may point to further increases in manufacturing production.
The index needs to be above 50 to indicate expansion in activity. It was 51.9 in May and 53.7 in June.
Though mining production contracted for the ninth consecutive month on a year-on-year basis in May, the pace of decline slowed to 4.4% from 7.7% in April.
Consumers in SA have, for a long time, driven economic growth through their spending. This has come to an end as they face mounting pressures including rising joblessness, high debt levels, high inflation and food and electricity costs.
The FNB/Bureau for Economic Research’s consumer confidence index fell to -11 in the second quarter from -9 in the first quarter as consumers felt more pessimistic about their finances and the economic prospects.
FNB senior industry analyst Jason Muscat expects household consumption expenditure to expand by just 0.2% in 2016.
The consumer spending trend is the same as has befallen private-sector investment, which has fallen to negative territory. Business confidence is still low and it needs to pick up before actual investment can increase.
The Rand Merchant Bank/BER business confidence index fell to 32 in the second quarter after remaining unchanged at 36 in the first quarter.
One element that has been eroding the buying power of household disposable incomes is inflation, which has eased from 7% in February to 6.1% in May. Despite its slowing this year, several economists believe it will edge higher in coming months.
With the economy being so weak, confidence and investment low and the rand off its weakest levels, it is increasingly looking as if the Reserve Bank may implement one more rate hike in 2016 against the two or three that were expected by some analysts earlier in the year.
The UK’s referendum to leave the European Union has fuelled speculation that central bankers around the world will either lower interest rates or keep them on hold for longer for fear that any hikes could further dent the already sluggish global economic recovery. These monetary policy expectations apply to the US Federal Reserve (Fed) as well.
If the Fed keeps rates unchanged for the rest of 2016, as is now widely expected, that will
contribute to dollar weakness and lead to a rally in the rand. A firmer rand will in turn limit pressure on price increases and support unchanged interest rates by the Reserve Bank.
Speculation around world monetary policy has led to capital flight into emerging markets including SA, which has seen the rand firm to around R14.30/$.
It is interesting that one Bank monetary policy committee member after the other has been highlighting the importance of inflation expectations. These expectations will be a key factor to watch in coming interest rate decisions. If they rise much above 6%, a rate hike could be on the cards.
The International Monetary Fund suggested the Bank consider holding interest rates steady “unless core inflation or inflation expectations rise substantially”.
What has been encouraging is finance minister Pravin Gordhan’s ongoing commitment to fiscal consolidation — which, if achieved, will boost SA’s chances of keeping its investment-grade rating.
Gordhan told an SA Chamber of Commerce & Industry meeting in July that more “tough measures” might need to be adopted if economic growth and tax revenues underperformed. Tough measures in the past have included tax increases and government spending cuts.
October’s medium-term budget policy statement will be tougher this year than it has been in previous years.
The numbers will have to show whether government is walking the talk to reduce spending and whether commitment to fiscal consolidation is really happening and to what extent.
Ratings agencies will certainly be watching the medium-term budget policy statement for any indication of how spending is progressing. By then, they will also have a clearer picture of how economic growth will perform in 2016.
All the revisions to economic growth continue to be downward. Treasury, which sees growth at 0.9%, will have to revise its own outlook lower in October when Gordhan delivers the medium-term budget policy statement.
The IMF seems to be the most pessimistic about growth in 2016, forecasting only 0.1%.
The consequences of low growth are dire: continued high unemployment, limited job creation and low levels of investment spending by the private sector. The IMF has reiterated the need for structural reforms, particularly in education and labour.
Government, business and labour have begun talks over reforms in the labour sector, most notably discussions around a minimum wage and a secret ballot before strikes.
SA may even be able to dodge the downgrades of its credit ratings to sub-investment grade if tangible progress can be demonstrated on economic growth-enhancing programmes and labour reforms before December, when ratings agencies next review the country’s credit ratings.
The meetings between government, business and labour that gained momentum early in 2016 helped stave off a mid-year downgrade, but ratings agencies may be tougher on SA if these get-togethers are still big on plans and limited on implementation.
One of the proposals that has emerged from these improved relations is the setting up of a R1.5bn fund by the private sector to help develop and mentor small and medium businesses. Getting this fund to become operational would go a long way in showing agencies that the social partners are not just talk but also action.
One thing will be crucial over the next few weeks: whether SA can go through wage negotiations in manufacturing and mining, among other sectors, and reach amicable wage agreements without strikes.
Gordhan has called for a “stable labour environment” during this time, especially now that government, business and labour should be focusing on co-operating to implement programmes to grow the economy. Experience has shown that employers may grant workers above-inflation increases, but that these normally come with either a reduction in staff or a freeze in new jobs.
What has been encouraging is finance minister Pravin Gordhan’s ongoing commitment to fiscal consolidation