Caught in a toxic mix
But glimmers of hope remain. The economy is gripped by stagflation,
south African consumers face precarious times as the rand looks set for a prolonged period of volatility and the economy sinks into what is known as stagflation – a toxic mix of slowing growth, rising inflation, and stubbornly high unemployment. The currency is unlikely to claw back much of the hefty losses it has endured over the past few months, which analysts believe will push inflation to the top of its target range early in 2019 and force the Reserve Bank to raise interest rates before this year is over, despite an inevitable public outcry.
At the time of going to print, the bank’s September monetary policy meeting had not ended, but a decision to keep interest rates steady now, despite a surprise dip in inflation in August, would only have postponed the inevitable. This is despite the fact that the country has sunk into its second recession in a decade.
If the bank does not take this controversial step, its inflation-fighting credentials will be called into question and the rand will be punished by financial markets, piling more pressure on business and consumers as the cost of imports – particularly fuel – continues to climb.
Pressure has already built for a petrol price increase of more than R1/litre in October, in response to the weaker currency and higher oil prices, which at one stage in the past few weeks climbed to $80/barrel – well above the level seen Chief economist at Rand Merchant Bank By Mariam Isa as healthy for the global economy.
The rand depreciated to R15.70 against the dollar, taking its losses against the US currency to about 20% this year, after news in early September that the economy shrank in the second quarter of this year, while the estimate of its contraction in the first quarter was revised lower.
“The currency will remain volatile, trading in a new and wider range of R14 to R15.50 against the US dollar over the next 12 months,” said Ettienne le Roux, chief economist at Rand Merchant Bank. “We’ve revised our rand forecasts weaker due to SA’s materially softer medium-term growth outlook, alongside a likely further fall in global industrial metal prices.”
There is growing consensus that the deepening trade war between the world’s two biggest economies will take a toll on global growth, reducing demands for commodities exported by emerging economies like South Africa. At the same time oil prices are unlikely to recede in the face of what is described as “geopolitical uncertainty”, which is being exacerbated by US President Donald Trump’s determination to tighten the screws on Iran’s economy.
Emerging markets bear the brunt of unfavourable developments, and although SA’s economy is in a better position than many, it will also suffer. Foreigners sold a net R127bn of domestic bonds and equities between May and mid-September this year, compared with net purchases of R32.3bn between January and April.
Rising US interest rates will continue to mute
“We’ve revised our rand forecasts weaker due to SA’s materially softer medium-term growth outlook, alongside a likely further fall in global industrial metal prices.”
Ettienne le Roux