Economics Weekly
Is it just a pause or the end of the post-lockdowns hiking cycle?
At its July meeting, the Monetary Policy Committee (MPC) decided to pause the prevailing hiking cycle, leaving interest rates steady at 8.25%. The question now is, is this the end or just a pause? The 2023 leg of the hiking cycle has been filled with uncertainty, and previous calls for a pause were disappointed. Now that the pause has finally come, we remain unsettled and are still pondering the risk of a resumption in the hiking cycle, especially with a 2-3 vote split between a 25bps hike and a pause, which indicates that discussions were contentious. The US Fed also paused their hiking cycle in June and expectations are for a very short-lived resumption next week. Since inflation is likely to be volatile in the current economic cycle and central banks appear prepared to deal with the communication headache of a hold-restart feature in policy decisions, we consider what may prompt that restart.
The MPC noted that global growth projections have stabilised, and inflation is easing but the overall outlook remains plagued by material risks brought about by geopolitical tensions and climate change. This has the potential to constrain trade, investment flows and growth, while also generating inflationary pressures. Nevertheless, central banks remain committed to their inflation targets and the road ahead is precarious for financial markets and emerging markets as debt vulnerabilities build up.
Locally, better growth outcomes and less intense load-shedding have aided a modest upward forecast adjustment this year (0.1ppt). However, commodity prices are not expected to find robust support from China's faltering growth while infrastructure issues continue to constrain export growth. This will weigh on SA's growth prospects, entrench the return to current account deficits and worsen funding risks as fiscal collections underwhelm projections, against the backdrop of mounting spending pressures. The MPC also acknowledged that even as monthly inflation outcomes have surprised to the downside, risks remain tilted upwards. These include sticky global inflation, a severe and prolonged El Nino phase, electricity and transport inflation amid capacity shortages and stubbornly above-target inflation expectations.
Naturally, should these risks materialise, the MPC's expected glide in inflation to 4.5% may be tested, prompting further policy tightening. In addition, although the rand has improved since the previous MPC meeting, it remains vulnerable to risk-off scenarios related to higher advanced economy interest rates, local politics, and weaker growth. These factors also present risks to an already imperilled fiscal trajectory, which could precipitate marginal inflationary pressures. For this reason, and the government's pricing power in network industries, calls for government participation in bringing inflation down are resounding. Failure in this could also see inflation expectations trend higher, adding upward bias to structural inflation.
While there are predictions of economic cycles being shorter and more amplified, interest rates may become characterised by longer (hiking) cycles with intermittent hold-restart patterns. Essentially, the globe appears to be in a phase of prolonged volatility as the low-inflation fundamentals over the previous decade, such as globalisation, are tested. After 475bps of hikes since November 2021, a pause has finally come but it comes with a debilitating caution that the hiking cycle has not ended so we brace ourselves for a bumpy ride. Fortunately, all things unchanged, this should be the end of the hiking cycle.
Week in review
After 13 consecutive months above the 6% upper limit of the inflation targeting range, headline inflation fell to 5.4% y/y (0.2% m/m) in June. The 0.9ppt fall from the 6.3% that was recorded in May mainly reflected continued positive base effects from last year's high inflation. Core inflation was 5.0% y/y, down from 5.2% last month, and monthly inflation of 0.4% was driven by housing. Fuel prices fell by 3.1% m/m and by 8.3% compared to last year. Food and NAB inflation was 11.0% y/y, down from 11.8% previously, but monthly price pressures of 0.5% prevailed. We predict inflation of around 5.0% in July, still supported by base effects, but monthly inflation should accelerate on the July lift in utility costs as well as the continued passthrough of higher input costs. Fortunately, load-shedding has been less severe, and should it continue, this reprieve should at least assist in avoiding a further rise in operating costs. Furthermore, the movement in fuel prices was muted between June and July and annual deflation should remain supportive of lower headline inflation. We anticipate that headline inflation will likely average around 6.0% this year before sustainably reverting to target on a protracted basis over the forecast horizon.
Retail sales volumes declined by 1.4% y/y in May, from a downwardly revised decline of 1.8% in the previous month (revised from -1.6%). This outcome marks a sixth consecutive month of annual decline in sales volumes. Seasonally adjusted volumes declined by 0.7% month-on-month, following an increase of 0.2% in April (revised lower from 0.4%). The weak performance was relatively broad-based, with five out of seven categories recording a decline in annual sales. General dealers lead the deterioration, with a decline of 3.7% y/y, detracting 1.6ppts to headline number. Countering this was a continued strong performance of Clothing and footwear retailers, with 10.3% expansion and contributing 1.8ppts. On a three-months to three-months basis, volumes sales are down by 0.7%, giving early indications that the retail industry will likely detract from 2Q23 GDP growth. Year-to-date, volume sales are lower by 1.2% compared to the same period last year. Looking ahead, the unexpected load-shedding reprieve and near R1 fuel price relief in June could provide near-term support, although this must be weighed against higher debt costs.
Week ahead
On Tuesday, the composite leading business cycle indicator for May will be released. The leading indicator declined by 1.1% m/m in April, following a 2.2% monthly decline in March. This reflected a broad-based decline across seven of the ten available constituent variables. The indicator declined sharply by 9.1% compared to April 2022, primarily due to a higher base, marking thirteen consecutive months of decline. Although driven by a higher base, the persistent annual decline in the leading indicator is consistent with the ongoing stagflationary regime. At current levels, we assess the leading indicator as signalling an elevated probability of significantly subdued (or recessionary) economic outcomes.
On Thursday, producer inflation data for June will be released. In May, producer inflation measured 7.3% y/y from 8.6% y/y in April, partly driven by a higher base from last year. Producer prices rose by 0.6% m/m after remaining flat (0% m/m) previously. At 7.3%, producer inflation reflected a sustainable decline from a peak of 18.0% y/y in July 2022. We expect producer inflation to have moderated further to around 5.7% y/y in June, further assisted by last year's higher base and an annual decline in petrol and diesel prices.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 19 Jul | SA | Headline CPI m/m | Jun | 0.2% | 0.2% |
| SA | Headline CPI y/y | Jun | 5.4% | 6.3% | |
| SA | Core CPI m/m | Jun | 0.4% | 0.1% | |
| SA | Core CPI y/y | Jun | 5.0% | 5.2% | |
| SA | Retail Sales m/m | May | -0.7% | 0.2% | |
| SA | Retail Sales y/y | May | -1.4% | -1.8% | 20 Jul | SA | SARB interest rate announcement | Jul | 8.25% | 8.25% |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 25 Jul | SA | Leading Indicator | May | -- | 110.3% |
| 27 Jul | SA | Producer price inflation m/m | Jun | -- | 0.6% |
| SA | Producer price inflation y/y | Jun | -- | 7.3% |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 77,016.83 | -0.4% | 0.3% | 13.8% |
| USD/ZAR | 17.90 | -0.1% | -2.6% | 4.4% |
| EUR/ZAR | 19.93 | -0.9% | -0.6% | 14.2% |
| GBP/ZAR | 23.04 | -2.1% | -1.7% | 12.2% |
| Platinum US$/oz | 953.50 | -2.0% | -0.9% | 11.1% |
| Gold US$/oz | 1,969.62 | 0.5% | 1.7% | 16.1% |
| Brent US$/oz | 79.64 | -2.1% | 4.9% | -25.5% |
| SA 10 year bond yield | 10.36 | -0.4% | -4.3% | -5.4% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | -0.1 | 1.1 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.8 | 0.9 | 0.9 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 3.0 | 4.2 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.2 | 5.5 | 5.0 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.6 | 5.0 | 5.0 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.50 | 8.25 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 12.00 | 11.75 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.80 | 18.00 | 17.50 |
Source: FNB
