Against a gloomy backdrop two positive developments stand out. One is that consumers may get the benefit of a fuel price cut at the end of the month. The second is that portfolio investment by foreigners remains strong.
The two trends are connected, because a strong rand neutralises the impact of high oil prices; and healthy flows into local shares and bonds help keep the rand firm.
Petrol prices are adjusted each month to keep them in line with prices of a basket of international oil products. In the month so far, the average daily overrecovery is running at nearly 25c a litre. If the price at the pump continues to top the basket price, motorists who are paying R10.23 a litre for 95 octane unleaded petrol in Gauteng will see the price trimmed for the second month in a row – after a reduction of 2c a litre this month.
However oil prices remain high, with benchmark Brent crude trading at just under $120 (R814) a barrel on Friday, after Opec failed to boost output last week. But, according to Bloomberg, Saudi Arabia will unilaterally put more oil into the market. So price pressures could subside. But key to the petrol price outlook is whether the rand continues to trade at present levels.
An important element of rand strength is the direction of investment. And, after a negative start to the year, portfolio flows have turned positive.
Leon Myburgh, the sub-Saharan Africa strategist at Citi, said net non-resident investment was worth R8.7 billion in the month to date and R25.3bn in the year to date.
While consumers can gain some comfort from these figures, at a time when most news is bad, the strong rand has contributed to a poor manufacturing performance.
Statistics SA reported last week that growth in the sector slowed to 0.4 percent year on year in April. Barnard Jacobs Mellet Private Client Services said the figure was “much lower than the 5 percent anticipated, and March’s reading of 4.6 percent”.
Colen Garrow, the economist at Brait, said if growth in manufacturing continued at this pace, the Reuters Econometer consensus of 3.8 percent gross domestic product growth this year might be too optimistic. He forecast growth between 3 percent and 3.2 percent.
“Of the 10 manufacturing sectors, only one – the sector radio and television falls into – registered growth. Contractions in the others ranged from minus 13.6 percent in electrical machinery to minus 0.5 percent in textiles, clothing etc.”
He pointed out that the health of local manufacturing depended also “on performances of key geographies. And these are not as supportive as they were at the beginning of the year.”
When the Reserve Bank monetary policy committee (MPC) meets next month, to make a decision on interest rates, it will weigh up the uncertain growth outlook against the prospect of rising inflation.
Cees Bruggemans, FNB’s chief economist, said inflation had “risen modestly these past nine months, from 3.2 percent to 4.2 percent”. And, over the next nine months, “it is expected to move twice as fast towards 6.3 percent”.
Though it might dip back below 6 percent it was likely to remain around that level, which, Bruggemans said, should be enough to raise interest rates by at least 2 percentage points, moving prime from 9 percent now to 11 percent by the middle of next year. - Business Report