ANNABEL BISHOP is Investec chief economist.
SUMMIT TV: Key economic data out as the South African Reserve Bank (SARB) deliberates on interest rates includes consumer inflation nudging higher in August, rising to 5% year on year, with retail sales more than halving in July to 4.2%. What was behind these numbers?
ANNABEL BISHOP: As you said, CPI rose from 4.9% to 5% so a tiny uptick — but we did see a 22c a litre uptick in the petrol price. Remember that was also the last month of winter so higher electricity tariffs were in play and demand was quite high as well. We do expect to see the upward trend continue for the rest of the year and indeed accelerate a little…
STV: Would you say we’ve seen the trough in CPI increases?
AB: That’s exactly right. We’ve seen the trough in CPI and we are likely to see it move towards 6% by the end of the year, essentially on higher food inflation. We’ve seen internationally that grain prices are at record highs because of the drought in the US and poor weather conditions in Russia. Even though they’ve had some rain it’s not been enough to save the maize crop so that feeds through into maize prices here because our prices are derived from international prices, where we sell for as much as we can get so there is a direct correlation. That’s come through already in the PPI (producer price index) at an agricultural level with grain prices running up 30% year on year…
STV: Presumably we will also see the impact of the fuel price increase of 93c a litre?
AB: Precisely. We are going to see significantly higher food price inflation for the remainder of this year and even though this month’s reading ticked down somewhat, the flows have not come through — that takes about two months to come through into CPI — but we will see along with that 93c fuel price hike inflation increasing into the end of the year.
STV: Is grain or meat inflation more important for us? Economists are suggesting meat inflation is going to start rising.
AB: The problem with grain price inflation is grain is used in animal feeds so that is going to come through in higher meat price inflation and higher diary prices, which will feed through into general inflation. We also saw soya beans and oil seeds impacted by the drought so most categories of food price inflation have been impacted. There are lags so while we’ve seen the grain price come through, meat prices will take longer.
STV: Are we seeing any evidence of demand-led price increases?
AB: Not really, core inflation without the external components be that energy or food — the actual underlying rate of inflation is running around 4.6% — so that’s close to the midpoint of the inflation-targeting range and that does not indicate strong demand-driven pressures. Nevertheless, the indication is that inflation will rise to 6% by the end of the year and the base inflation is calculated off is much higher which is going to push up Reserve Bank expectations for the year.
STV: Retail sales seemed a very weak reading and much lower than everyone was expecting — I think consensus was around 7% in July but it came out around 4%. Why the dislocation between what the market was expecting and what we got?
AB: The real concern is that 8.6% is extremely robust growth so in comparison 4% seems quite weak and there is concern about the big drop. But 4.2% on its own, although modest, is certainly not something that’s indicating the consumer is collapsing. The way I read it, if we look at the trade expectations index from Sacci (the South African Chamber of Commerce and Industry), that looks at expectations four to six months ahead, they were looking at a lower growth rate in June and a higher growth rate in July, so if one averages that out it pretty much comes up to what the trade expectations were a few months ago.
I think it’s just one of those situations where you’re seeing figures that are a bit jumpy due to intramonth effects and then as we move into the next few months that should pick up a bit. I do believe that 8.6% retail sales growth is unsustainable — we are looking at household consumption expenditure around 3.7% year on year so this 4.2% is much closer in line with what’s expected for this year.
STV: So there isn’t a major consumer slowdown in this economy?
AB: No, this is only one month’s figure. If this were to persist and drop to 3% that would be an indication — but one often sees a month where sales are very strong and in the next month sales move down. We saw good growth in clothing sales in June and that came off in July which was pretty cold and sales dip in very cold months. As it warms up people might shop more again.
STV: What’s more important for the SARB? They have an inflation mandate and need to keep prices under control but it seems the emphasis has shifted to worries around growth. Which number will be more important for the MPC (monetary policy committee)?
AB: I think they’re going to be looking at expected future inflation in 2013 and 2014 so higher inflation will put paid to another interest rate cut. We’ve also seen the advent of a third round of quantitative easing (QE3) in the US and ratification from the German constitutional court on the European stability mechanism which is the permanent bail-out fund for the eurozone. Obviously on the back of that the European Central Bank (ECB) will increase purchases of sovereign debt in Italian and Spanish bonds, so those are positives that make a different global environment as compared to when the MPC met in July. We are looking at a slightly improved outlook from that point of view so the Reserve Bank won’t be as cautious as they were then, probably leaving interest rates on hold.
STV: With other central banks loosening monetary policy and the Bank of Japan adding a stimulus programme does this pose a quandary for the SARB? Our interest rates affect the rate at which the rand trades against other currencies so might they be "forced" to ease even if they are not keen?
AB: This round is a bit different and QE3 is different to QE2, where it’s now focusing more on agency mortgage bonds in the US like Fannie Mae and Freddie Mac. The issue there is we need to see significant increases in mortgages that will then result in an increase in purchases which will increase liquidity and that’s what drove many emerging markets with the previous rounds.
This time around it’s not government bonds, which the banks can easily buy and hold and sell on, so this is much more liquid. The housing market is weaker in the US and this special QE3 is to try support that particular market. It’s probably going to be a slow trajectory but it is concerning if we do face a wall of liquidity again and the SARB will look at that.
The point really is that going forward we’ve seen global monetary easing and that is supportive of improved global growth which in turn will make the SARB less concerned about the outlook this year as it’s being affected by global events. If we do see an interest rate cut in November that may be a 25 basis points cut not a 50 basis points cut but at the moment we think it’s a hold for both meetings.