Recession narrowly averted - experts

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IOL pic aug20 rand banknotes 100 200 in hand Associated Press File picture: Denis Farrell

Johannesburg - Second-quarter growth figures come out tomorrow and they are expected to show that the economy narrowly averted recession.

Market expectations are that gross domestic product (GDP) expanded by between 0.4 percent and 0.8 percent following a contraction of 0.6 percent in the first quarter.

Even so, the news will be cold comfort to those without jobs, with the latest unemployment rate at 25.5 percent – one of the highest in the world.

The first-quarter contraction was due to many factors, but the major culprit was the protracted strike in the platinum sector.

The effect reverberated through the manufacturing and retail sectors, Investec noted in its commentary ahead of the GDP data.

The textbook definition of a recession is two consecutive quarters of negative growth. If indeed the economy got a reprieve in the second quarter, it would mean the Reserve Bank has succeeded in its bid to contain inflation without undermining growth.

Forecasts for growth by the International Monetary Fund for 2014, 2015 and 2016 have been revised downwards progressively from 4.4 percent, 4.5 percent and 4.7 percent, respectively, to 1.7 percent, 2.7 percent and 3.2 percent.

But even with a sputtering economy, inflationary pressures have persisted, forcing the Reserve Bank to raise interest rates twice this year.

The toxic mix of slower growth and rising inflation has shown itself in the strain faced by households as the pressures of servicing debt exact a toll.

“The risks surrounding the economic outlook for South Africa remain on the downside,” Investec said in a note to clients on Friday.

“These economic growth considerations, coupled with the likelihood of a gradual moderation in consumer inflation back into the target range by year-end, support the view that the upward interest rate cycle will be particularly shallow. We expect the repo rate to remain unchanged at 5.75 percent for the remainder of the year.”

Economic forecasters are divided as to whether the Reserve Bank’s monetary policy committee (MPC) will raise interest rates next month.

Consumer inflation eased to an annual 6.3 percent in July from a peak of 6.6 percent in June, mainly thanks to falling food prices and a moderate petrol price rise of 29c a litre (which brought the annual increase in the price of petrol down to 8.3 percent from a peak of 14.3 percent two months ago).

It was the first slowing in the rate of inflation since November last year and may set a pattern for months to come.

“We think the Reserve Bank will hike rates by 25 basis points at the end of September,” Rand Merchant Bank (RMB) said on Wednesday.

Its base case was a further rise of 50 basis points next year, with the repo rate peaking at 7 percent in 2016.

RMB said the timing of this hike was supported by the potential for consumer inflation to fall below 6 percent by the time the MPC met in November, which would significantly reduce the opportunity and the reasoning for another hike in the short term.

The outlook for core inflation remained tricky, it said. Core inflation, which is headline inflation less fuel, food and electricity costs, was at an annual 5.7 percent in July. It was marginally up from 5.6 percent in June and was at its highest level since January 2010.

RMB said minutes from the Federal Reserve’s July meeting, released on Wednesday, hinted that the surprising strength in the US jobs market could lead to an earlier-than-expected rate hike there.

RMB said core inflation and the prospect of Fed hikes justified ongoing “policy normalisation” by the Reserve Bank.

Azar Jammine, the chief economist at Econometrix, said the main reason for a lower inflation rate was that the rand had stabilised since its steep depreciation in January.

“At the current rate, inflation could come back to within the inflation target, possibly even as early as September.

“The latter figure will only be published in October and so one still cannot rule out a further 0.25 basis point rate hike at September’s MPC meeting as the Reserve Bank attempts to assert its long-standing warning about a build-up of inflationary pressures,” he said.

“However, it may prove difficult to increase rates beyond that in the medium term unless the rand resumes significant depreciation, which cannot be ruled out.”

Gina Schoeman, an economist at Citi Research, expected the Reserve Bank to revise down its fourth-quarter inflation outlook at next month’s meeting, acknowledging that the headline consumer inflation rate peaked in June.

“We expect its outlook to mimic our forecast for a downward trajectory in inflation from here on, falling below the 6 percent ceiling in early 2015.

“This downward inflation trajectory, with an increasingly poor GDP outlook, now leaves us expecting the Reserve Bank to keep the repo rate unchanged at 5.75 percent at its September MPC meeting.”

She said that by the time of the November MPC meeting, data for September and October would have shown the inflation rate flirting with the top end of the 3 to 6 percent target, allowing the Reserve Bank to again keep rates unchanged.



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