/ 21 January 2015

More money in pocket as cost of living falls

Economists warn that falling inflation as a result of lower oil prices does not necessarily mean interest rates will be reduced or that South Africa’s growth prospects will increase.

ANALYSIS

South African economists were correct in predicting that the latest consumer price index (CPI) figures – the measure of inflation – released today would be revised downwards by Statistics South Africa (Stats SA), leaving consumers with more disposable income.

Stats SA announced that annual CPI inflation dropped to 5.3% in December 2014 from 5.8% in November 2014, mainly because petrol and food prices clocked up lower annual inflation rates. But economists warn that falling inflation as a result of lower oil prices does not necessarily mean interest rates will be reduced or that South Africa’s growth prospects will increase.

In an interview with the Mail & Guardian prior to Wednesday’s Stats SA announcement, Investec group economist Annabel Bishop said lower petrol prices have caused downward revisions in CPI inflation. 

Bishop explained that the petrol price fell by R1.10/litre in 2014, and then again by R1.23/litre in January 2015. She added that another R1.04/litre cut is 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.” She correctly predicted that CPI inflation would come in at 5.3% for December 2014.

Nedbank had also revised its CPI inflation expectations to 5.5% prior to the announcement. Nedbank economist Busisiwe Radebe said that lower petrol prices would play a big role in the general trajectory of “disinflation” or falling inflation. But she 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 United States 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 preferences
According to the International Monetary Fund (IMF) world economic outlook update report for 2015, growth in the US rebounded ahead of expectations and unemployment declined, whereas inflation pressure remained muted.

The stronger economy and the projected gradual rise in interest rates have caused a shift in investor preferences, with many opting to invest in the US rather 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 would cause the already volatile rand to weaken. “We [Nedbank] used to think that they [the Reserve Bank’s monetary policy committee] will increase interest rates, but if inflation is stable for the next 18 months the [committee] might keep [interest] rates stable,” Radebe said.

On the other hand Investec believes the Reserve Bank 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 South Africa 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 such as investment weaknesses, constraints on electricity supply, labour productivity and falling commodity prices.

Growth forecast
On Tuesday, the IMF revised its growth forecast for sub-Saharan Africa down to 4.9% from 5.8% in 2015 (and to 5.2% from 6% in 2016), citing lower oil and commodity prices as the reason.

South Africa’s growth forecast has been reduced to 2.1% in 2015 from 2.3%, and from 2.8% to 2.5% in 2016. Radebe said that growth projections were even lower because of labour 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 on export earnings and contribute to the trade deficit.”