January numbers – the main points

John Loos, senior economist at Absa says that January’s trade deficit recorded R3,4 billion, down from a R2,8 billion surplus in December.

January’s exports increased by 5,5% y/y, down from 7% previously. On the other hand, total imports showed strong growth, rising by 21,3% y/y, up from 18,6% in December.

Exports of textiles, clothes and footwear contracted significantly. Growth in exports of live animal products and vegetable fats also declined in January.

However, growth in imports of vehicles and mineral products picked up strongly in January. Strong growth was also evident for imported food and beverages as well as for other miscellaneous manufactures.

January is typically a weak month from a trade balance point of view. One would expect that following on strong consumption expenditure in December there would be significant inventory replenishment, which would translate into strong import value growth.

Nevertheless, over the past decade most of the trade balances have been in surplus for January, and the magnitude of this deficit suggests another year of significant pressure on trade emanating from the strength of the rand.

Furthermore, we do not expect the currency pressure to relent in 2005. This implies that a relatively strong economy will continue to be driven by domestic demand (stimulated by relatively low interest rates and cheap imports) rather than by export growth.

Deficits such as these put the SARB between a rock and a hard place because low inflation suggests lower interest rates, but lower interest rates can also support import demand and deteriorating trade and current account deficits which could put pressure on the currency at some stage.

However, in a dynamic world, one can expect that lowering the cost of capital for companies through interest rate cuts, as well as stimulating demand and therefore production capacity utilisation, should lead to higher levels of fixed capital formation.

This may exert initial pressure on the trade and current account balances, but in the longer term may reduce the current account constraint on the economy.

Therefore, the negative trade figure is not expected to entirely put the brakes on interest rate cuts, and a 50 basis point repo rate cut is expected in April, followed by a further one later in 2005.