Bank’s policymakers sit on the horns of a painful dilemma
Watching Nicole Magolie stretch our national anthem out like a tired ‘80s cassette tape in Genoa on Saturday I was reminded of the five members of the SA Reserve Bank’s monetary policy committee sitting uncomfortably on the horns of a real dilemma this week — and trying to get up to speed on how to respond.
A raft of US Federal Reserve speakers tried to stem the rising tide of optimism emerging in markets about a possible pivot following a slightly cooler than expected October inflation reading. St Louis Fed president James Bullard suggested rates could now settle at 5%-7% in the US, which would necessitate central banks around the world following in lockstep to avoid the severe negative fallout of such a move on their currencies.
The Bank’s primary mandate — “to protect the value of the currency in the interest of balanced and sustainable economic growth” — will be severely tested in the boggy swamp that is SA’s economic recovery from Covid-19. I wouldn’t be surprised if third-quarter GDP comes in flat, despite consensus of a mild expansion of up to 0.4% quarter on quarter seasonally adjusted (qqsa).
Surveying the data is rather like a curate’s egg. Building completions fell, while finance, real estate and business services activity overall is likely to have lifted, along with the transport sector. Farmers are cautiously optimistic — another way of hedging your bets, with La Niña threatening to dump too much water on already saturated soils.
Agbiz warns that the drop in third-quarter confidence by seven points from the second quarter reading of 60 was “not as strong as the previous seven quarters”. Consumers, who still account for 60% of GDP, are holding back on big ticket items. The BankservAfrica Economic Transactions Index showed the volume of transactions rose between the second and third quarters while values were flatter, lifting 1.1% quarter on quarter but dropping in real, seasonally adjusted terms.
Retail trade sales fell 0.6% year on year in September, after August’s 2.1% year-on-year lift. The result was weaker than Bloomberg consensus projections. Five of the seven retail categories declined on an annual basis. The great DIY trend of the pandemic is in reverse gear, with the hardware, glass and paint subcategory contracting for the 15th month in a row, subtracting 0.8% points from headline outcome, while even the usually resilient food, beverages and tobacco segment of the retail basket fell by a further 8.1% year on year, slicing 0.7% points off the total.
September’s result concludes the third quarter’s retail readings. Calculated on a qqsa basis, the measure used to compute GDP, retail activity fell 1.9% and will be another drag on the headline GDP reading. Industrial production’s third quarter expansion of 1.6% qqsa will provide a substantial counterweight to the lack of consumer confidence. But we are coming off a low second quarter base due to the KwaZulu-Natal floods, without which the reading would have contracted instead, by just more than 1% qqsa. Industrial production accounts for 20.5% of GDP.
The base effects might paper over the cracks, but it’s undeniable that stage 6 load-shedding in September smothered confidence. Added to this, the economy is facing ominous global headwinds. On Wednesday Barclays economists cut their global economic growth forecast for 2023, warning that it looks set to be one of the weakest years in four decades, with advanced economies likely heading into a recession. ’They now forecast global growth at 1.7% on a yearon-year basis, compared with September s forecast of 2.2%.
Locally, inflation appears to have peaked. After front-loading hikes this year and acting early, the Reserve Bank has bought itself some time to wait and assess conditions in the new year and not play its usual Grinch role before Christmas.
Sadly, the expectation is growing that we are in for a huge 100 basis point rate increase, which will do nothing to stop exogenous inflation drivers such as oil and local government administered prices. But it will be effective in further stalling our economic recovery and potentially consigning us to even lower growth than the tepid forecasts contained in the October medium-term budget. And slower growth means less money for the government to spend on its social welfare programmes and the capex required to lay the foundations for faster growth in future.
The Bank will be justified in trotting out the usual tropes about the state being responsible for implementing faster economic reforms. But for once, it would be better served to conduct a deeper introspection into the role monetary policy plays in establishing the cost of capital above which the private sector must secure a return to justify investment. Yes, over the long run we must bring that hurdle rate down by increasing our investment grade, which is for once starting to look up. But in the short term, and to support the reform agenda inside the government, primarily in energy, the Bank might have to step out of its black tower to live in the real world.