By Annabel Bishop
The Monetary Policy Committee (MPC) meets next week, on 22nd July to decide on its interest rate stance, and is unlikely to focus on the need for any normalisation of monetary policy as it has in recent weeks, prior to the current unrest in the country.
While it is too early to assess what the damage is to the economy, the SARB’s economic growth forecast of 4.2% y/y for 2021 made at its May MPC meeting, and which it was likely to revise up to closer to 4.5% y/y at its July MPC meeting, if not beyond that, will now likely be revised down instead in light of the negative impact on the economy from the destruction and loss of property over the last few days.
With the situation not yet fully under control, and likely to see negative effects drag on over Q3.21, we believe there is a risk that the third quarter of 2021’s GDP could contract significantly, and possibly a flat to slightly negative outcome for Q4.21 GDP activity occur, as both consumer and business confidence will drop.
Investor confidence has been knocked, with the rand now at R14.71/USD, but reaching R14.79/USD earlier today, and at risk of breaching R15.00/USD, from R14.17/USD a week ago. While no change in the repo rate is likely next week, there will be volatility in a number of economic indicators in the short-term, and it is unclear when the rioting will cease.
Food, medical supplies and fuel shortages are expected in some areas, with supply chains disrupted, and price pressures lifting in response.
The latest CPI inflation reading was for May, at 5.2% y/y, and in June it is expected to have dipped to 4.9% y/y as the deep base effects of a year ago which pushed up inflation steeply in April and May this year wear out of the system.
July’s CPI inflation data however is likely to see a dip to 4.6% y/y, also on base effects wearing out of the system, although from August inflation will rise again on a large petrol price hike and the impact from the rioting and resultant supply chain shortages.
South Africa’s terms of trade and exports will be negatively affected, in turn impacting the rand which has already seen some marked weakness and this in turn feeds back into higher fuel prices and so higher inflation.
Food prices account for a large part of the CPI, at 15.5%, and have already risen to 6.8% y/y in May from 4.8% y/y in May 2020, and 2.8% in May 2019, pushed up by high international food prices, although maize prices have moderated recently on a strong harvest.
Globally, US inflation is expected to have peaked in June, on supply chain constraints and rising demand as the leisure economy restarts on a high rate of vaccination, adding to fuel price pressures.
Evidence of higher US food, fuel, rent and clothing price pressures have emerged, with the FOMC recently showing a lift in its members’ interest rate expectations, albeit out only in 2023.
However, SA risks great difficulties in any interest rate hikes this year, and likely into next year given the expected marked weakness of economic activity absent a quick cessation of the severe riot action still taking place, although there is no certainty when this will occur.
The outlook for South Africa is uncertain overall however on the harm that has been done by the rampant rioting and destruction of property, with foreign investor sentiment set back. It is not likely all businesses severely damaged/destroyed will wish to restart.
GDP will be negatively impacted from the export and production side, as well as the consumption side, lowering the economic outlook, while tax revenues will be harmed, and so South Africa’s credit rating risk has grown.
South Africa is seeing is unrest driven both politically and by socio-economic (poverty) factors, and the IMF warns this tends to have the harshest economic effects.
Annabel Bishop is the Chief Economist at Investec
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