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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

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