It is not a great environment for consumers going forward, according to economist Sanisha Packirisamy of MMI.
There is likely to be a further 25 basis point interest rate hike by the SA Reserve Bank (Sarb) during the course of 2016, in her view.
She foresees this happening despite what she describes as a pedestrian growth rate in SA, stubborn inflation expectations, an expected widening of the current account deficit and a rising inflation profile.
In her view it was the right thing for Sarb to hike the interest rate in November. It hiked the repo rate by 25 basis points to 6.25%. She expects the repo rate to stay at 6.5% for the second half of 2016 after yet another expected 25 basis point increase.
"Despite a weak gross domestic product (GDP) environment, we expect another 25 basis point increase over the course of 2016, because the inflation trajectory is uncomfortably close to 6%, which makes it vulnerable to currency shocks," explained Packirisamy.
She expects a slight inflation breach in the first quarter of 2016. Important upside risks to the inflation outlook include the rand and above-inflation wage settlements. The effects of the drought could also start filtering through.
As for the rand, Packirisamy said it remains under pressure due to US Federal Reserve interest rate normalisation, the risk the slowdown in China's economy brings for emerging markets and poor domestic macro fundamentals in SA. The rand is also vulnerable to a widening SA current account deficit.
She foresees a muted domestic outlook for SA where struggling business confidence could be an indication of the economy being in a downturn. She sees a marginal GDP uptick in SA in 2016 and mounting headwinds for domestic demand.
"We are not particularly optimistic on the recovery in domestic demand," she said.
Source: Fin24
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