Deficit, PPI trounce market forecasts

FACTORY gate price inflation slowed to 8.1 percent in June from 8.7 percent in May, against market expectations of 8.4 percent, and is expected to continue receding.

More good news is that the trade deficit narrowed steeply to minus R2 million in June from a revised R7.4 billion shortfall in May.

According to data released by Statistics SA yesterday, inflation for final manufactured goods increased by 0.3 percent on a monthly basis in June.

Annual percentage change in the producer price index (PPI) for electricity and water slowed to 8.2 percent.

Nedbank economists Dennis Dykes and Busisiwe Radebe said producer inflation would remain elevated, but would slowly decline in the coming months, mainly as a result of a moderation in global food prices.

They said food prices made up 26.33 percent of the headline PPI basket.

Kamilla Kaplan, an economist at Investec, said a key influencing factor in the June PPI was the effect of petrol and diesel price declines, as well as in May. This was reflected in the slowing price growth of the coke, petroleum, chemical, rubber and plastic products category to 9.3 percent from a prior annual 11.3 percent.

She said overall, developments in global commodity markets were consistent with a gradual global economic recovery and surpluses in a number of commodity markets.

This is partly reflected in the recent slowing in the annual growth rate of the rand denominated continuous commodity index.

Kaplan said: “With meaningful upward demand-led price pressures still absent, and with supply side pressures abating, there is scope for lower consumer price index [CPI] outcomes in the second half of 2014. This would provide the Reserve Bank with the room to proceed with monetary policy normalisation at a very gradual pace.

“We expect the next interest rate hike of 25 basis points to occur in March 2015 as inflation falls over the second half of 2014.”

Azar Jammine, the director and chief economist at Econometrix, said: “The good news for inflation prospects implied by these figures suggests that further increases in interest rates may be limited to just 0.25 percent over the remainder of the year. If there are further increases next year, they are likely to be driven more by a tightening of global monetary policy than by domestic factors.”

Meanwhile, the trade deficit narrowed to minus R2m in June, as vehicle exports soared and imports of oil decreased.

The deficit narrowed from a revised R7.4bn shortfall in May, Sars said. The median estimate of 13 economists surveyed by Bloomberg was for a shortfall of R6.3bn. An improvement in the trade gap supports the current account, which posted a deficit of 4.5 percent of gross domestic product in the first quarter.

The rand weakened 1.4 percent against the dollar in the first six months of the year, improving the competitiveness of exports even as a strike at platinum mines halted production.

Christie Viljoen at NKC Independent Economists said: “Exports would have worsened again in July due to the strike in the metals industry, which disrupted vehicle manufacturing.” – Additional reporting Bloomberg