Johannesburg - Economic indicators continue to spell imminent doom for South Africa’s economy, as Statistics SA released producer inflation numbers yesterday that exceeded analysts’ estimates, indicating an interest rate hike is likely in the second half of the year.
The producer price index (PPI) for final manufactured goods rose 8.8 percent year on year in April, up from 8.2 percent in March and against market expectations for 8.4 percent.
“The inflation outlook remains poor in the short term. The Reserve Bank has made it clear that we are in a rate-hiking cycle, but the extent and speed will be data-dependent,” the Nedbank Group Economic Unit said yesterday.
“Tuesday’s negative first-quarter gross domestic product (GDP) data and continuing turmoil in the mining sector decrease the likelihood of an early rate hike. However, with inflation rising and the rand still vulnerable, we anticipate mild tightening towards year-end.”
It said producer inflation would remain elevated in the coming months. The currency and higher food prices, the largest category in the PPI, posed the biggest risks to the inflation outlook.
The PPI figures came on the back of a 0.6 percent contraction in GDP in the first quarter, and the platinum strike continuing with barely a month left to the end of the second quarter.
The economy was stalling on the sustained platinum sector strike, which significantly affected mining and manufacturing production.
The main drivers of the PPI rise were the food, beverage and tobacco products category, which contributed 3.1 percentage points to the 8.8 percent rise.
Annabel Bishop, the chief economist at Investec, said the fallacious argument for rand weakness as a stimulant for economic growth should be disregarded for the misleading advice that it was.
“South Africa’s rising state administered prices and imported inputs are substantially raising the cost base for domestic businesses, making them less competitive globally. The translation effect of the rand weakness on domestic commodity prices, such as metals and minerals, which are priced in dollars, also contributed to the direct effect of rand weakness on the PPI.”
On a month-on-month basis, factory gate prices rose by 1 percent in April.
Economic consultancy Econometrix said this clearly reflected the lagged impact of the rand’s steep depreciation over last year and January this year. It said the 8.8 percent headline producer inflation rate was ominous for the prospects of consumer price inflation reversing its upward trend for the next few months.
“Accordingly, it sustains the significant probability of some interest rate increase in the second half of the year, especially if and when the platinum strike is resolved and overall macroeconomic conditions assume a semblance of normality.”
Transport equipment rose 11.1 percent year on year and 1.8 percent month on month.
The PPI for administered prices of electricity and water rose 10.4 percent in April compared with 14.6 percent in March. The PPI for electricity and water increased by 3.1 percent month on month.
There was a steep decline in the PPI rate for agricultural food prices, to 8 percent in April from 13.3 percent in March.
Econometrix said there were some indications that producer inflation might begin to recede in coming months as reflected in steep decline in agricultural food inflation. The sharp slowdown in the rate of escalation in electricity tariffs should also filter through in reducing the rate of increase in overall input costs. - Business Report