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More of the same from the new Reserve Bank governor

19 November 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

If you thought incoming Reserve Bank governor Gill Marcus would back down to trade union demands then you’re sorely disappointed. Apart from a slightly different approach to the Monetary Policy Committee (MPC) announcement, it was business as usual where the central bank’s conservative inflation targeting policy was concerned. When the MPC team gathered earlier this week they chose to leave the Repo rate unchanged at 7%. South Africa’s official prime lending rate remains at 10.5%. The news hardly came as a surprise. In the run up to the meeting only two of 23 economic analysts predicted a 50 basis point cut.

The committee’s conclusion: “There are no major demand side pressures on inflation, and [our] assessment is that there are no significant upside risks to the inflation outlook emanating from this source.” Their view is that CPI will fall within the Reserve Bank’s 3% to 6% target early in 2010 and remain there through 2011 when inflation is forecast to average just 5.5%.

Reasons for the status quo

Why did the governor adopt a ‘no change’ stance? One of the reasons, according to StanLib economist Kevin Lings, is that the global inflation outlook remains benign. The world’s largest economies aren’t feeling inflationary pressures despite recent improvements in commodity prices. As a result South Africa’s import bill – aside from changes in demand – should remain stable through 2010. Inflation is largely under control on the domestic front too. Lings notes that “the domestic outlook for inflation remains favourable as a result of weak demand pressures.”

The scourge of food price inflation has largely disappeared. “It continued to moderate, and at 4.9% is now exerting downward pressure on overall inflation,” said Lings. In much the same way producer prices posted a fifth consecutive monthly decline in September 2009, contracting 3.7%. Lings singles out electricity price increases as the main threat to inflation going forward.

FAnews Online is particularly concerned over the likely economic impact of Eskom’s three-year tariff hike proposal. The state utility has applied for a 45% price increase in each of the next three years. An annual increase of this magnitude could be a death knell for the consumer driven economy. Big corporations with annual turnovers in the billions are probably not too fussed. Pick ‘n Pay need only raise prices 0.2% to compensate for the 45% electricity price increase for example! The real danger is the massive reduction in net disposable income in the average household, combined with the pain smaller businesses will feel. We’ve already heard about glass manufacturers that intend shutting their foundries and importing product if the hike gets the nod.

A return to growth – for now

The MPC decision was made against the backdrop of a recovering economy. Consensus is South Africa Inc will emerge from recession in Q3 2009. Unfortunately we’re not likely to see a return to the ‘all cylinders’ 5% per annum GDP growth for quite some time. “Domestic output appears to be recovering and the leading business cycle indicator of the central bank has continued its positive trend, but there are still doubts about the speed of recovery,” said Lings.

It seems the economy will be hampered by struggling consumers. We haven’t seen any sustained improvements in motor vehicle sales, house prices, or sales of other ‘big ticket’ items despite the 500 basis point interest rate reduction since December 2008. The reason is consumers are absorbing other inflation plus increases with the cash freed up by these rate cuts. How many of you remember the 31.3% plus electricity hike pushed through this year? We were only reminded of the increase while paging through AngloGold Ashanti’s Q3 2009 result. The group warned “should Eskom’s request be granted, pressure will be placed on the cost structure of [our] South African operations which currently account for 40% of annual production.”

Bleak Christmas for retailers

How does the average consumer react when net disposable income shrinks? The answer is fairly simple – they spend less. This trend is already in evidence in Statistics SA retail sales data. Retail sales contracted in real terms by 5.1% year-on-year (y/y) September 2009 – a big number after the equally disappointing 6.5% y/y contraction in August. What’s going on?

We turned to a Standard Bank Economics forecast of a bleak Christmas for retailers. In this report the group observes a multi-faceted recovery in household demand. Non-durable goods (mainly food) lead the way, while improvements in semi-durable and durable goods are less evident. “The recovery in the costly, often credit-financed, retail categories will strongly hinge on the speed at which households’ financial positions are nursed back to health,” said the bank. They remain negative on the short-term retail industry outlook.

The bank also noted that positive signs in the manufacturing and utility sectors had not yet appeared in the retail environment. The bank observes that the latest “relatively bleak sales data could be a precursor of a subdued festive season!” And they don’t expect a marked improvement in the sector until Q2 2010!

Editor’s thoughts: There’s no doubt that local consumers are under pressure. Through 2009 we’ve had to absorb above-inflation increases in electricity, medical aid payments and municipal rates and taxes – leaving precious little for luxuries. As far as cost of living increases go, 2010 could be a repeat of this year. Have you decided to curtail your spending over the festive season? Add your comments below, or send them to gareth@fanews.co.za

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