MANY RED-LETTER DAYS COMING UP IN JULY
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.