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Stagflation well and alive, but is it the end of equity price corrections?

The start of the recovery in global share prices, higher precious metal prices and a stronger rand, however, may indicate a recovering of share prices on the JSE, says economist Chris Harmse. File photo

The start of the recovery in global share prices, higher precious metal prices and a stronger rand, however, may indicate a recovering of share prices on the JSE, says economist Chris Harmse. File photo

Published Jul 25, 2022

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Stagflation seems to be well and alive for South Africa for the nearby future. Stagflation can be defined as persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.

The strong increase in South Africa’s inflation rate to 7.4 percent in June, together with its highest level of unemployment of more than 34 percent, describe this stagnation reality for the country.

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The inflation rate now is double the 3.2 percent recorded in March last year (2021). The increase of 0.75 percent in the repo rate by the Monetary Policy Committee (MPC) of the Reserve Bank last week, demonstrates the almost check mate situation that policy sits in with given this worst of two worlds situation.

The expected further acceleration in the inflation rate to levels exceeding 8 percent over the next few months gave the MPC no other choice but to raise interest rates and probably will have to increase the repo rate again at its next two meetings.

The worst of this is that the economy is likely to move into a recession during the third and fourth quarters of this year.

The start of the recovery in global share prices, higher precious metal prices and a stronger rand, however, may indicate a recovering of share prices on the JSE.

The method behind this madness of the repo increase is mostly to protect the value of the rand to prohibit further inflation fears.

The current spur in the inflation rate is mostly due to the sharp increases in fuel prices that had increased by 45 percent since last June, electricity and other fuels that had surged by 14.5 percent and food prices that increased by 9 percent over the past year.

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Given the sharp increase of 257 cents a litre of 95 Petrol on July 6 is likely on its own to increase the inflation rate in by a further 0.25 percent. Given the strong depreciation in the rand from R15.82 to the dollar at the end of June to R17.23 on Thursday morning, just before the announcement of the repo rate increase by the MPC, the committee had no other choice than to aggressively increase the repo rate.

The policy stance of trying to keep in front of the inflation cycle with its repo rate policy seems to have immediately influenced financial markets. The rand to dollar exchange rate appreciated strongly during Friday and the currency closed on R16.84 on Friday, gaining 40c over night.

Another positive development is the strong recovery in the prices for gold, platinum and palladium. On Friday alone, the gold price had shot up by $28 per ounce to $1 728 (R29 101) and platinum had surged by $12.15 and palladium had a massive improvement of $158 per ounce (8.45 percent).

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These developments contribute towards a possible recovery in equities on the JSE. After the all share index had reached it lowest weekly close level of 65 391 points on June 17 (-11 percent down for the year), the index had improved with 4.1 percent to 68 069 on Friday, or 7.6 percent, down for the year.

This movement is in line with similar corrections on Wall Street where the Dow Industrial index since June 17 had improved 7.8 percent and the S&P 500 by 9.6 percent, also on the back of two sharp increases in the US Federal Bank rate.

At the same time, it is expected that fuel prices may start to decrease from August, given the much lower price for oil and the stronger rand. On June 21 the price for 95 Petrol already was over recovered by 168c and a sharp fall in fuel prices is expected to be announced on Friday.

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This coming week, the release of South Africa’s production price inflation rate (PPI) will draw attention. It is expected that the PPI had increased by a massive 2.8 percent from 14.7 percent in May 2022 to 17.5 percent in June.

This would indicate that the CPI rate (consumer inflation) is likely to advance strongly in July suggesting another repo rate at the MPC’s next meeting. On global markets, investors await the FED’s interest rate decision, and the market expects another hike of 0.5 percent to 2.5 percent.

The release of various US home sale numbers, durable goods orders, crude oil stock data, and its preliminary gross domestic product (GDP) growth rate data will also be important. Various other developed market economies, like France, Germany and the EU will also release preliminary GDP growth numbers, and fears exists that they may move into negative growth territory.

Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.

Chris Harmse is an economist at CH Economics and lecturer at the School of Commerce at Stadio University.

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