Bank yet to show growth sustainability as consumer demand recovers

ECONOMIC WEEK AHEAD

THE SA Reserve Bank (Sarb) Quarterly Bulletin (QB) will be the key document next week, but there are also important releases on consumer inflation, the leading indicator, steel production, retail, wholesale and motor trade.

The Statistics SA release shows how well the economy is doing, with growth at 3.1% on a quarterly annualised basis in the fourth quarter.

The Sarb QB will show whether it is sustainable, as it will show the current account deficit and the extent to which foreign capital inflows cover the deficit. That addresses sustainability from the foreign side, while household disposable income changes, the ratio of household debt to income and the ratio of inventories to gross domestic product (GDP) will determine the sustainability of the domestic sector.

In the third quarter of last year, the current account deficit narrowed to 2.4% of GDP from 2.3% in the second quarter. There have been substan- tial revisions to GDP, so these ratios may also change.

Disposable income grew by 2.7% in the third quarter, just above household consumption growth of 2.6%. That helped the debt- to- income ratio of households to ease to 72.5% in the third quarter, from 72.6% in the second quarter. The inventory to GDP ratio dropped to 12.1% of GDP in the third quarter from 12.3% in the second quarter and 12.6% in the first quarter as manufacturers could not keep pace with the recovery in consumer demand.

Consumer inflation eased to 4.4% year-on-year (y/y) in January from 4.7% y/ y in December. It is rich carnivores that are keeping inflation above 4.0% y/y, as the lowest income group had an inflation rate of only 2.2% y/y, while the highest income group had an inflation rate of 4.6% y/y as meat inflation was 13.4% y/y in January.

Overall, food inflation eased to 4.9% y/y in December from 5.2% y/y in November. Core inflation, which excludes volatile components such as food and energy, slipped to 4.1% y/y in January from 4.2% y/y in December. There should be an easing to 4.2% y/y in overall inflation in February largely owing to the slowdown in the petrol price y/y increase.

Steel production grew by 8.1% y/y in January after sur- ging by 20.9% y/y in December and a 10.1% y/y rise in November, so a return to double-digit growth is expected in February.

The leading indicator fell by 0.5% m/m in December. The leading indicator is supposed to forecast economic activity six months ahead. Four of the nine component time series that were available for December fell, while five rose.

The largest negative contributions came from a decrease in the 12-month percentage change in the number of new passenger vehicles sold and a decrease in the average number of hours worked in the manufacturing sector. The largest positive contributions to the movement in the composite leading business cycle indicator in December came from an increase in the number of residential building plans passed, followed by an increase in the South African-produced export commodity price index (US dollar-based). Real retail trade sales rose by 5.6% y/y and surged by 9.3% q/q on a seasonally adjusted annualised basis in the fourth quarter. Some slippage in y/y retail sales growth is expected in January. Real wholesale trade sales fell by 1.5% y/y, but surged by 7.0% q/q on a saa basis in the fourth quarter.

Real wholesale trade has been subdued the past two years owing to the drought and low oil prices, so an improvement should be expected this year. Nominal motor trade sales rose by 7.2% y/y in the fourth quarter, but new vehicle sales fell by 8.9% y/y in January, so a y/y decline in motor trade sales should be expected.