Steady as she goes

Reserve Bank governor Mboweni said that the MPC meeting has been concluded and that while the world outlook remains positive, with widespread growth the order of the day, the major risks have not changed since their last meeting.

We are not scared of the consumer spending, but we have looked closely at the pattern and the MPC wants to avoid “demand-push inflation”.

On the currency question, Mboweni said that the MPC don’t want an exchange rate that may result in price pressures on the up side.

The buoyant world conditions and the local increase in demand, from 3% in 2003 to 5.6% in 2004, augur well, and while growth was firm, there are indications of slowdown in the production growth.

In terms of the inflation outlook, Mboweni says that the number has fluctuated around the mid point of the target, due to petrol price fluctuations.

Costs of running motor vehicles and lower food prices forced cpix numbers down in December. CPIX numbers are down from 2003 and are due to tight management and rand strength.

In contrast the inflation in services remained stubbornly high – including medical costs and education fees, well above the upper limits. There is a long way to go in bringing the administered prices under control.

The rand appreciated further in the Q4 of 04, while it has eased back slightly, although it remains strong, although there was an increase in the brent crude price. The short term outlook improved due to a drop in crude prices.

Expectations of inflation that fall within the inflation target can be maintained in the range. The moderation in salary increases is also a good sign. Unfortunately labour productivity growth dropped in Q4.

Speed of change and adjustments is aimed at maintaining inflation numbers within the target range. The central forcast CPIX could rise a little above the midpoint of the range and then ease somewhat, in 2005.

International economic conditions

Brent crude oil prices having been climbing since December, and US oil inventories and the OPEC announcement on quotas, while the Iraqi elections did have an effect was reversed in the week of the elections.

Interestingly oil prices are 21% higher than they were in December. Going forward they are looking at slightly higher oil prices – there seems to be no significant upward pressure.

Internationally there seems to be some upward movement in the US consumer confidence figures, while unemployment figures are comes down, although labour market productivity is down, with unit labour costs up. There is some upward pressure on core inflation.

Imports into the USA continue to climb while exports are tapering off.

The Asian economy has been fairly vibrant, in spite of the disasters that have hit the area, from the bird flu to the tsunamis.

Turning to Japan, real gross domestic product shows a small growth of 0.2%, with consumer confidence improving and labour markets are looking solid. The unemployment rate has dropped while consumer prices seem to be on an upward trend. In China CPI is down.

The euro zone shows moderate growth indications, with 1.4% and 2.4% growth for 2005, and slightly up on that for 2006, while unemployment numbers have increased.

In the UK there was a growth of 3% in the last quarter, while consumer prices have increased. An interest rate decision was due today.

In SA the export performance is correlated to the major trading partners, while growth numbers (real GDP) for Canada, New Zealand and Canada are all down on last year.

So what about inflation numbers in Africa? Well, these were fairly subdued, and in fact interest rates were generally unchanged since the last MPC in December.

The world inflation outlook is fairly benign.

Onto the local financial markets then. Dollars are still being bought, although this decreased in January, due to liquidity pressures.

In terms of gross gold reserves – this has improved – as has the net reserves figure. It would have been better if the gold price hadn’t declined.

On the bond markets – internationally it was a mixed bag – up slightly in USA, due to an announcement on clamping down on labour costs, while in the UK the worse than expected inflation figures played a role. While in Germany the numbers looked a little rosier.

Locally the market is bullish based, on the yields seen on government bonds.

Locally on the currency markets – there has been a depreciation – driven by what was happening to the dollar, specifically, but more recently against a basket of other currencies. The commodity prices supported the local markets.

There were larger inflows of forex into portfolios and into the JSE during the last quarter of 2004, although this tapered off in January.

Locally the leading business cycle indicator was going north, while manufacturing data shows that production recovered in December, while the Investec pmi indicated a lack of buoyancy.

On the equity markets all had a torrid time, especially the USA with the Dow taking a hammering, while the JSE flew, with the resources coming back strongly in December and January.

Another indicator is real building plans passed, which is 28% up in real terms, compared to last year, and the same was true for new vehicle sales, with a year of year increase of 20%.

On the imports and exports side – in rand terms – this increased last year while the trade balance is at about R4bn, annualised, with the trade balance slightly lower.

M3 growth was up in the corporate sector, and substantially higher than holdings in the household sector. While on the credit extension area households were the biggest users, while household debt was increasing steadily as a proportion of disposable income.

On house prices there was a steady growth and mortgage advances are up. SA is at the top of the pile internationally when it comes to house prices.

National government revenue, and company tax turning up quiet nicely, with customs duties up nicely, while government deficit, was pretty much the same as the previous year. Government debt levels increasingly nicely from the end of March.