Breath of hope for an easier year ahead

Data released this week certainly left us feeling lighter as it confirmed the year ahead will be more palatable.

The devastating effects of the drought are fading, and the agriculture sector is expected to contribute positively to GDP growth. Growth should lift and inflation should stabilise.

In fact, headline inflation positively surprised, slowing to 6.3% year on year in February from 6.6% in January. Importantly, core inflation (CPI excluding food and non-alcoholic beverages, fuel and energy) eased to 5.2% year on year, the lowest rate in over a year, indicating that underlying inflationary pressures are easing.

According to our forecasts, this measure of inflation should fall below 5% from the second half of the year. Food inflation continued to moderate, rising 9.9% in February relative to 11.2% in January. Bread and cereal prices continued to decelerate in February, while vegetable prices contracted for the first time in 16 months, on a year-on-year basis.

However, meat prices maintained an upward trajectory and will likely only peak early towards the end of the year, if not early 2018. While this will limit the deceleration in food inflation, this should be offset by sustained rand appreciation. So average inflation should fall below 6% in 2017, provided the rand remains supportive.

The rand has strengthened by around 8.4% since the beginning of the year, and has ranged between R13.31 and R12.50 to the dollar in March. The improvement in the rand has been supported by a cautious policy statement delivered by US Federal Reserve chairwoman Janet Yellen, which pointed to a more gradual Fed hiking cycle.

The pick-up in commodity prices, less political noise and positive economic data - specifically the narrowing of the current-account deficit from 3.8% of GDP in the third quarter of 2016 to 1.7% in the fourth quarter - have also lent support to the rand. The trade balance recorded a surplus of R56-billion in the fourth quarter from a deficit of R7-billion in the third quarter. Import compression - owing to weak domestic expenditure and a rise in exports due to higher commodity prices and foreign demand for domestically produced goods - contributed to the trade surplus.

The income balance also improved notably over the quarter, supported by a significant increase in dividend receipts from abroad.

Our view on the current account remains constructive for the year ahead. Granted, the surge in dividend income may not be sustained. However, the trade balance should fare better, supported by higher commodity prices and weak spending.

The better-than-expected inflation outcome along with the notable narrowing of the current account will provide the Reserve Bank with much-needed relief. The monetary policy committee will deliver its interest rate decision this week. While the bank's outlook on inflation is more bearish relative to the consensus view, it will likely be revised to reflect the recent economic data and improvement in the rand.

Downward revisions to the inflation forecast and the weak growth outlook will cement the end of the hiking cycle.

The Reserve Bank has previously cut interest rates when the Fed increased US interest rates; so we regard the probability of a rate cut this year as high, especially in the context of higher global growth and improving emerging-market growth. A lower policy rate will provide much-needed support to an ailing economy.

Nxedlana is FNB chief economist