ANALYSIS
Some economists believe that the latest consumer price index (CPI) figures – the official measure of inflation in South Africa – due to be released today will be revised downwards by Stats SA leaving consumers with more disposable income.
The downward revision on inflation was contributed to lower oil prices. However, they warned that falling inflation as a result of lower oil prices does not necessarily mean interest rates will fall or that South Africa’s growth prospects will increase.
In an interview with the Mail & Guardian, group economist at Investec, Annabel Bishop, said lower petrol prices have caused downward revisions in CPI inflation. Bishop explained that in South Africa the petrol price fell by R1.10/litre in 2014, then dropped again by R1.23/litre in January 2015. She added that a R1.04c/litre cut is also scheduled for February.
“The substantial cuts in the petrol price have caused downward revisions in CPI inflation with our CPI outlook for 2015 lower now at 4.6% from 5.1% previously. We expect CPI inflation to come out at 5.3% tomorrow [Wednesday] for December 2014,” she said.
Nedbank has also revised its CPI inflation expectations to 5.5%. Nedbank economist Busisiwe Radebe told the M&G that lower petrol prices will play a big role in the general trajectory of “disinflation” or falling inflation. However, Radebe warned that lower inflation would not necessarily result in lower interest rates or higher growth prospects.
“You see what is going to happen to the rand is that it is going to weaken especially as interest rates in the US increase. We will see an uptick of capital outflows as investors take their money from emerging markets and into the US,” said Radebe.
Shift in investor preference
According to the International Monetary Fund (IMF) world economic outlook update report for 2015, growth in the US rebounded ahead of expectations, unemployment declined while inflation pressure remained muted.
The stronger economy and the projected gradual rise in interest rates have caused a shift in investor preferences with many of them preferring to invest in the US than in emerging markets. This is reflected in the appreciation of the US dollar and the weakening of emerging market currencies.
Radebe said that capital outflows from South Africa will cause the already volatile rand to weaken. “We [Nedbank] used to think that they [the Monetary Policy Committee] will increase interest rates but if inflation is stable for the next 18 months the MPC [Monetary Polcy Committee] might keep [interest] rates stable,” Radebe said.
However, Investec is of the view that the MPC will increase interest rates. Bishop said Investec revised its repo rate hike expectations from 75 basis points (0.75%) to 25 basis points (0.25%) for the current year.
“But this will change if commodity prices rise meaningfully, and in particular if SA experiences substantial petrol price increases,” she said.
Even though lower oil prices could lead to demand-side growth as consumers increase their spending, the IMF has stated that this growth will be offset by negative factors including investment weakness, structural constraints on electricity supply, transport infrastructure, labour productivity and the fall in commodity prices.
Growth forecast
On Tuesday, IMF revised its growth forecast for sub-Saharan Africa down to 4.9% from 5.8% in 2015 (5.2% from 6% in 2016). The lower oil prices and commodity prices were reasons given for the further lowering of growth projections.
South Africa’s growth has been reduced to 2.1% from a previous 2.3% in 2015 and reduced from 2.8% to 2.5% in 2016. Radebe told the M&G that growth projections are even lower because of strikes.
“Strikes are stoppages of work, which means less production takes place. When there’s no production, there is no output and no growth,” she said.
“Also the falling of commodity prices means negative growth. Lower commodity prices negatively impact export earnings and contribute to the trade deficit,” said Radebe.