Bank set to cut rate — again
Oil price fall, lack of demand and worsening outlook put lid on inflation
● President Cyril Ramaphosa’s stern Wednesday night lockdown message has heightened expectations that the Reserve Bank will opt for another large interest rate cut when it meets this week, as a worsening economic outlook puts the lid on inflation.
Economists are revising down their forecasts yet again, after Ramaphosa made it clear on Wednesday that SA was likely to shift just one lockdown notch down to level 3 only next month, though there could be different levels in different provinces.
The lockdown timelines directly impact economic forecasts. Economic modelling by public and private sector economists has indicated that there is a meaningful opening up of economic activity and employment only at level 2, and that prolonging the level 4 lockdown, even for another month, could do permanent damage to the economy.
This is despite the fiscal and monetary stimulus that the government and the Reserve Bank are injecting into the economy, with an S&P Global report this week noting that SA’s record monetary easing has been more sizeable than that of many other emerging markets, as has the fiscal stimulus of about 3.5%-4% of GDP.
The Reserve Bank had forecast last month that the economy would contract by 6.1% this year, and inflation would average 3.6%, but at that stage the lockdown was still scheduled to end on May 1.
With the government making it clear that restrictions will be lifted only gradually, the Bank is expected to revise its forecasts again when the monetary policy committee begins its scheduled May meeting on Tuesday.
The crash in oil prices has helped to push inflation down but weak domestic demand will drive it down further, curbing businesses’ ability to raise prices even if a weaker rand raises the cost of imported goods.
That is expected to create the space for a further interest rate cut, adding to the 225 basis points of cuts that the Bank implemented since the beginning of this year, freeing up more than R80bn of spending power.
And economists expect another 50 to 100 basis point cut on Thursday.
BNP Paribas economist Jeff Schultz sees inflation averaging a 17-year low of 2.8% in 2020, and expects another 125 basis points of rate cuts this year.
“Strong deflation in fuel prices and collapsing demand are likely to outweigh a weaker rand and its limited pass through into the consumer price index,” Schultz said in a note this week.
RMB Morgan Stanley economist Andrea Masia now expects inflation to average 3.1% this year, and to rise to just 3.8% next year, which would mark the third consecutive year in which inflation has printed below the mid-point of the 3%-6% target range.
“Although there is some evidence of opportunistic pricing of essential goods by retailers during the lockdown, we see sufficiently strong disinflation in the rest of the basket to drag headline CPI below 2% by June 2020,” he said.
The Reuters consensus forecast for May shows economists on average see GDP contracting by 6.4% this year (on a quarterly contraction of 36% in the second quarter), but some see much steeper falls, taking the prolonged level 4 and level 3 scenario into account.
Latest Google mobility data indicates that workplace activity in SA was on average 66% lower than normal during level 5 of the lockdown.
PWC economist Lullu Krugel said this week that PWC’s modelling indicates that the SA economy could contract by as much as 13% this year, based on the current riskadjusted approach communicated by the government.
In a new study, published this week, Deutsche Bank economist Danelee Masia estimates that in level 4, 47% of the economy (accounting for 37% of GDP and 34% of employee pay) was prevented from integrating into mainstream activity.
A substantial share of the services and trade sectors begins to operate at full capacity only from level 2 onwards.
“Thus the longer it takes to get to level 2, the more damaging the lockdown is likely to be ... around 10% of GDP will be at risk of permanent destruction if level 2 isn’t reached soon,” she writes.
On her calculations, a shift to level 3 brings only an additional 15.5% of GDP into operation, with just over 72% of non-government sectors active.
Her “bear case” forecast is now for the economy to contract by 11% this year and for growth to remain negative next year.
At the current pace of re-opening the economy, Business for SA sees the economy contracting by 14.5% this year even after the stimulus package, putting 2-million formal sector jobs at risk, and millions more in the informal sector. However, if SA moves quickly to level 2, the economy would contract by just over 10%, and over 1-million jobs could be saved, increasing access to food and health services.
B4SA’s Martin Kingston said business did not have a problem with differentiated levels of lockdown if these were based on up-todate health and transmission data, but “the regional approach could be very challenging if you have supply chains or workforces that cross regional boundaries”.
The prolonged economic shutdown will also do severe damage to public finances, with details now expected when finance minister Tito Mboweni tables his adjusted supplementary budget on or after June 24, on a date to be decided by parliament.
Deutsche Bank’s Masia does not see the budget deficit dipping below 11% over the next two years, and predicts the government’s debt ratio will increase to 82% this year, compared with the Treasury’s February estimate of 65%.
Deflation in fuel prices and collapsing demand are likely to outweigh weak rand Jeff Schultz
Economist at BNP Paribas