Reserve Bank weighs rates in another year of 'going nowhere slowly'

Spending by households and investment by business are expected to continue to be constrained, heightening the pressure facing the Reserve Bank's monetary policy committee when it deliberates on interest rates this week.

Economists expect the central bank to keep interest rates unchanged as the pace of headline inflation slows further. The most recent Bureau of Economic Research inflation expectations survey indicates there is less pressure currently on the bank to raise interest rates. But political and economic uncertainty at home and abroad are key threats to the inflation outlook.

MMI Investment and Savings economist Sanisha Packirisamy expected headline CPI to drop from a reported 6.1% year on year in March to 5.4% year on year in April.

She said headline inflation was expected to decline over the course of the year and to dip to below 5% in early 2018 as food inflation slowed and agricultural prices declined. Meat prices would remain elevated. A cap on electricity tariffs would help to moderate inflation.

Wandile Sihlobo, head of agribusiness research at the Agricultural Business Chamber, said a bumper maize harvest of 14.5million tons was expected this year, which indicated recovery from the drought, although there was a 60% chance of another, milder, drought later this year. Good recovery was expected in food production in the next nine or 10 months, Sihlobo said.

Elize Kruger, a senior economist at NKC African Economics, has forecast that inflation will average 5.6% this year, which may lift spending slightly. But, with political tension overshadowing the economy it may be another year of "low spending, muddling along, going nowhere slowly", she said.

Mixed data from the retail, mining and manufacturing sectors over the past week indicate marginal improvements but also point to an economy flirting with recession.

Economists expect manufacturing and retail performance to weigh negatively on GDP growth for the first quarter of 2017. StatsSA will announce the official figure next month. The primary sector — mining and agriculture — is expected to prop up GDP in the first quarter, following improved production.

Expectations for GDP for the year have repeatedly been revised downwards, especially following the cabinet reshuffle in March as domestic factors constrain the economic outlook.

The IMF recently revised South Africa's growth for 2017 to 0.8% from a forecast of 1.1% in July last year.

But in another display of how uncertain these times are, this week it again revised the growth rate — to 1% — due to solid agricultural production as the drought receded, and mining output improved.

It sees 1.9% for South Africa over the next five years, lagging other sub-Saharan African countries, such as Botswana, for which it expected 4.2%, and Mozambique, for which it expected 7.3%.

Weak growth has been exacerbated by the downgrade of the government's credit rating to junk by Fitch and S&P Global Ratings in April.

Moody's has yet to downgrade South Africa, but is expected to lower the rating one notch for now, which would put the country one level above junk on its scale.

On a quarterly comparison, economists expect stronger economic growth in the first quarter, quashing the possibility of a recession despite lower productivity due to the many public holidays which this year fell in March (and not April, as they did last year).

The economy shrank 0.3% in the fourth quarter of last year.

But BNP Paribas Securities has forecast a seasonally adjusted annual rate of growth of 1.5% between the two quarters. Nedbank had predicted growth of 1.1% with a dip to 0.4% in the second quarter and a recovery to over 1% in the two successive quarters.

Thabi Leoka, economic strategist at Argon Asset Management, said: "We've been flirting with a recession for some time."

She predicted that the trend of weak quarterly GDP was likely to continue this year.

Leoka said if S&P downgraded the local currency rating to sub-investment grade it would put the economy at a greater risk of slipping into recession.

Nedbank CEO Mike Brown, who is also involved in the CEO Initiative, a group of CEOs who worked with the government and labour to avert downgrades and promote inclusive growth, said: "Given the impact of the drought last year and improved commodity prices, we believe the chance of recession is low this year.

"However, if local currency debt is downgraded to below investment grade, a recession next year is likely."

Brown said the CEO Initiative had estimated economic growth to be 0.7% for 2017.

The CEO Initiative had previously identified "green shoots" in the economy, which Brown listed as "improved confidence, improved prospects for the financial markets from a stronger currency and an improved current-account deficit" following export growth as the global economy recovers.

But Johannes Khosa, economist at Nedbank, said the tense political environment in the build-up to the ANC policy conference next month and the elective conference in December was likely "to have a big impact on confidence".

Khosa expected private sector investment to remain constrained this year.

Household spending is also expected to remain weak despite an 0.8% improvement in retail trade sales in March after economists predicted a contraction.

Food, beverage and tobacco sales showed double-digit growth year on year, and furniture and household appliance sales also rose. But supermarket sales slumped 0.8% and clothing and textiles fell 5.6%.

Retail sector data read with manufacturing and mining data provide clues to the health of the economy.

Philippa Rodseth, executive director of the Manufacturing Circle, said that despite the marginal year-on-year improvement in manufacturing production reported by StatsSA last week, "the bottom line is that the performance remains patchy".

The mining sector reported 15.5% year-on-year production growth in March.

Chamber of Mines chief economist Henk Langenhoven said: "Uncertainties still prevail ... including concerns relating to regulatory uncertainty and impact of the ratings downgrade. Declines in the platinum price and negative sentiment around iron ore prices, among others, underscore this."