Financial Mail - Investors Monthly - - Opening Bell - Up­side risks to in­fla­tion would be se­vere rand weak­ness due to eco­nomic shock, such as fur­ther rat­ings down­grades Es­ca­la­tion in po­lit­i­cal tur­moil and mount­ing ev­i­dence of deep-seated cor­rup­tion in the public sec­tor had ‘de­stroyed’ house­hold, busi­ness and

T ax sea­son opens in July but it is the Re­serve Bank’s mone­tary pol­icy com­mit­tee meet­ing later in the month that will set the tone over the com­ing weeks.

The cen­tral bank was fore­cast to cut in­ter­est rates this year as the pace of in­fla­tion con­tin­ued to ease into the sec­ond half of the year. De­clin­ing eco­nomic mo­men­tum, weak busi­ness and con­sumer con­fi­dence and the credit rat­ing down­grades have quick­ened the re­quire­ment for rate cuts.

But econ­o­mists are di­vided over how soon the Re­serve Bank should lower in­ter­est rates to boost con­sumer spend­ing — given that the econ­omy con­tracted by 0.7% in the first quar­ter of 2017, tip­ping the econ­omy into re­ces­sion for the sec­ond time in eight years.

The com­mit­tee will meet over three days from July 1820 and is ex­pected to cut 25 ba­sis points at a time. At this meet­ing the bank may again lower its growth fore­cast.

This would be the first time the com­mit­tee has cut rates in at least five years. In July 2012, the com­mit­tee low­ered the rate to 5% but has steadily raised the rates since Jan­uary 2014.

Jo­hann Els, se­nior econ­o­mist at Old Mutual In­vest­ment Group, said the on­set of the re­ces­sion would trig­ger the re­quire­ment for at least two rate cuts this year and two more in 2018.

“Ul­ti­mately they will need to cut rates by July or Septem­ber. They need to cut soon while they have a win­dow of op­por- tu­nity — this be­ing a strong rand, low(er) in­fla­tion, weak econ­omy, low cur­rent ac­count deficit and a rat­ings re­prieve for the next six to 12 months.”

Moody’s and S&P Global Rat­ings have re­tained the coun­try’s lo­cal cur­rency rat­ing on in­vest­ment grade. The bulk of govern­ment debt is de­nom­i­nated in rand. Only Fitch has down­graded both for­eign and lo­cal cur­rency rat­ings to junk.

“We ex­pect a grow­ing con­sen­sus among econ­o­mists that calls for more rate cuts this year too,” Els said.

But the econ­omy would pos­si­bly not gain a sig­nif­i­cant boost from a 25 ba­sis points cut, though this should boost sen­ti­ment.

Any cuts would take time to work through to the real econ­omy. But these cuts would help the growth out­look down the line, “which should ac­tu­ally please the rat­ings agen­cies and in­vestors”, ac­cord­ing to Els.

He said up­side risks to in­fla­tion would be se­vere rand weak­ness due to eco­nomic shock, such as fur­ther rat­ings down­grades in com­ing months.

“I see more down­side in­fla­tion risks: the oil price seems well-be­haved around and be­low $50/bbl, the rand is sta­ble, we have a weak econ­omy, still-fall­ing food in­fla­tion, fall­ing con­sumer-goods in­fla­tion rates,” he said. While in­fla­tion was 5.3% y/y in April, it was ex­pected to ease to 4.8% in July, he added.

Statis­tics SA will pub­lish the June in­fla­tion up­date on July 19 and July in­fla­tion on Au­gust 23. On July 20, Stel­len­bosch Univer­sity’s Bu­reau for Eco­nomic Re­search will re­lease its in­fla­tion-ex­pec­ta­tions sur­vey re­sults.

Nazmeera Moola, co-head of fixed in­come at In­vestec As­set Man­age­ment, said weak eco­nomic growth strength­ened

The com­mit­tee will meet over three days from July 18-20 and is ex­pected to cut 25 ba­sis points at a time. At this meet­ing the bank may again lower its growth fore­cast

the case for a rate cut. “While the bank is clearly wor­ried about the im­pact of SA’s pol­i­tics on the rand and thus in­fla­tion, the wide­spread weak­ness in the do­mes­tic econ­omy could spur a cut as early as July. The econ­omy is just that weak.”

Dur­ing the first quar­ter of 2017 ev­ery cat­e­gory af­fected by con­sump­tion trends — aside from ser­vices — con­tracted. The nom­i­nal gross do­mes­tic prod­uct (GDP) growth rate was dis­torted by the im­pact of higher per­sonal in­come tax dur­ing the quar­ter, Moola noted. Nom­i­nal GDP be­fore taxes grew by a weak 6.3%.

Dur­ing the quar­ter, com­pen­sa­tion was also at its weak­est nom­i­nal growth rate since the early 1990s — due to con­tin­ued job losses, weak wage growth and tax hikes.

“The con­sumer has no fur­ther abil­ity to ab­sorb tax hikes. There will be a large neg­a­tive im­pact on growth if this oc­curs,” Moola added.

The SA Rev­enue Ser­vice (Sars) will open the tax sea­son for the fil­ing of re­turns at the start of July. But econ­o­mists ex­pect anaemic growth, now fore­cast to be lower than 1% for 2017, to re­sult in weak govern­ment rev­enues.

Moola said: “The new [fi­nance] min­is­ter will be mak- ing a dif­fi­cult de­ci­sion at the Oc­to­ber medium-term bud­get pol­icy state­ment. Govern­ment will be left with the un­for­tu­nate choice of hav­ing to cut ex­pen­di­ture fur­ther.”

Nicky Weimar, se­nior econ­o­mist at Ned­bank Eco­nomic Group Unit, said it was wiser for the Re­serve Bank, for now, to main­tain rates for sta­bil­ity pur­poses. “If the econ­omy con­tracts again in the sec­ond quar­ter then I be­lieve the case for cut­ting in­ter­est rates in July or Septem­ber gets much stronger than it cur­rently is.”

Weimar said dra­matic es­ca­la­tion in po­lit­i­cal tur­moil and mount­ing ev­i­dence of deepseated cor­rup­tion in the broader public sec­tor had “de­stroyed” house­hold, busi­ness and in­vestor con­fi­dence. “We ex­pect house­holds to spend more mod­estly in the quar­ters ahead, af­ter the sharp cut­backs of the first quar­ter.”

By con­trast, fixed in­vest­ment is ex­pected to de­cline fur­ther and govern­ment spend­ing to re­main re­strained, she said. The pri­vate sec­tor ac­counts for 60% of to­tal fixed cap­i­tal for­ma­tion.

In July, a bet­ter global en­vi­ron­ment and a still-com­pet­i­tive cur­rency should sup­port the pur­chas­ing man­agers in­dex, Weimar said.

The Absa pur­chas­ing man­agers in­dex — which mea­sures sen­ti­ment in the man­u­fac­tur­ing in­dus­try — will be pub­lished on July 1, fol­lowed by the broader Stan­dard Bank Markit PMI on July 5.

Im­prove­ments in the pri­mary sec­tors — agri­cul­ture and min­ing — were ex­pected to con­tinue. Slight im­prove­ments in man­u­fac­tur­ing pro­duc­tion and an in­crease in re­tail sales at a mod­est rate were also ex­pected in July, ac­cord­ing to Weimar.

Stats SA will pub­lish man­u­fac­tur­ing pro­duc­tion and sales for May on July 11, with min­ing pro­duc­tion and sales on July 13 and re­tail trade data on July 19.

On July 31, the Re­serve Bank will pub­lish monthly data in­clud­ing, among other things, the lead­ing in­di­ca­tor: a gauge of where the eco­nomic growth cy­cle is headed. At the time of writ­ing the in­di­ca­tor had slumped to 0.4% be­tween Fe­bru­ary and March, fol­low­ing a re­duc­tion in the pro­duced ex­port com­mod­ity price in­dex af­ter the in­di­ca­tor rose 1.1% in Fe­bru­ary.

Also on July 31, Sars will pub­lish trade statis­tics, round­ing off the key eco­nomic data for the month.

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