It was Steven Meyer who reproduced an essay from Michigan Historical Review 28: 2002 about how industrial automation at one of the Ford Motors plants in the 1950s was like an “Economic Frankenstein” and how the government had a duty to protect labour at the time.
Fast-forward to the 21st century, that same analogy can be used to describe one of the worst inflationary periods in recent memory. Central bankers globally have become the face of the devil. With civil society always ready to bring the pitchforks and torches to show discontent and disapproval of the persisting interest rates hikes to combat inflation.
South Africa is no different to any other economy battling macroeconomic pressures domestically, however, we are quite unique in that our challenges are further exacerbated by the idiosyncratic elements that the powers that be, lack the will to resolve.
On the first edition of the Financial Stability Review 2023, the South African Reserve Bank warns that government needs to urgently implement structural reforms in order to revive an economy that is currently in a state of stagflation — high inflation rate, high unemployment rate and stagnant economic growth.
Inflation rate permutations for May?
Even though our economy averted a technical recession in the first quarter of this year — probably because of the low base from the horrible fourth quarter of 2022 due to the bruising Transnet strike that affected our imports and exports — we are not out of the woods yet.
Headline inflation has been hovering above 7% since last year June, reaching a peak of 7.8% in July 2022, perpetuating one of the longest interest rate hiking cycles — 10 consecutive hikes since November 2021— in our young democracy. While the main contributing factor has been the food inflation, this has somehow slowed down in the previous month, although still very much elevated by historical standards, peaking at 14.4% in March this year and declining to 14.3% in April.
One of the most damaging idiosyncratic factors within this environment remains the consistent load shedding that has elevated input costs and pushed the general prices of goods and services even higher. SARB estimates that this factor alone, has the potential to dock 2 percentage points from our projected GDP growth for the current year.
Headline inflation to decline further?
With lighter load shedding stages over the past few weeks, it is easier to agree with the market consensus that CPI will continue to ease to around 6.5% for the month of May.
The high interest rate environment seem to be dragging headline CPI to within the SARB target band, although it is not expected to hit the midpoint of 4.5% within this year.
Any concerns with core inflation?
The pure formula of core inflation is: Headline CPI — (food and non-alcoholic beverages + fuel and energy). In simple terms, this gives an idea of the real inflation in the economy.
The obvious concern within the South African context is the fact that even though the nominal inflation (headline CPI) — which includes food and energy — continues to decline, the real inflation continues to go the opposite direction.
The market consensus here suggests that core inflation might decline 10bps back to 5.2% for May, which sounds reasonable considering the load shedding reprieve we have experienced over the past few weeks.
Have we reached the peak of the interest rate hiking cycle yet?
Possibly yes. Even though we cannot expect to see any interest rate cuts until at least 2024. Governor Lesetja Kganyago has always maintained the Monetary Policy Committee’s decisions will always be data-driven. Meaning there is no need to remain hawkish if the “medicine” (interest rates) as he prefers to call it, has the desired outcome.
This could mean that if the headline CPI print continues to trend downwards for May and June, there would be no need to effect more interest rate pain in July during the next MPC meeting and we could be at the peak of the cycle.
Other economies globally have already paused or begun to cut their interest rates as macroeconomic pressures continue to ease and the US banking crisis that saw Silicon Valley Bank, Signature Bank and First Republic Bank all collapse, seems to be contained.
Of course a major part of this will take into account the power situation in the country and how the economy continues to plan for what Eskom now calls an unlikely event — the total grid collapse — and Transnet’s management of our freight infrastructure for imports and exports.
