Poor data may disrupt Reserve Bank’s hiking cycle

PRICES increased at a slower pace in April compared to a year ago, while growth in retail sales was significantly more sluggish in March, presenting a strong case for the Reserve Bank to leave interest rates unchanged on Thursday.

 
The moderation in consumer inflation to 6.2%, from 6.3% in March, kept it above the higher end of the target band for the fourth month in a row. Inflation spiked from 5.2% in December to 7% in February.

The easing in retail sales growth to 2.8% in March, from 4% in February, affirmed that household spending and, therefore, economic growth was slowing as consumer spending bolsters the economy. Statistics SA released the data on Wednesday.
Although these data support unchanged interest rates at the Bank’s monetary policy committee meeting, inflation is expected to continue to rise on higher food prices and the weaker rand. Inflation remaining high and outside the 3%-6% target band, will mean more interest rate hikes in 2016. The consensus among 13 economists surveyed is for the repo rate to stay on hold at 7%. Three said the rates, which have already gone up 200 basis points since January 2014, could rise 25 basis points.

Despite headline inflation easing, food inflation hit a four-year high of 11% from 9.8% in March mainly due to shortages because of the drought and a weak rand, which made imports more expensive.
A combination of very weak economic growth and the moderation in inflation would probably allow the Bank to pause interest-rate increases, Capital Economics Africa economist John Ashbourne said. Food and fuel prices would, however, push inflation up later in 2016, he said.
The 2.8% retail sales figure was the first below 3% since May 2015, when load shedding had limited retail activity, FNB senior industry analyst Jason Muscat said.
Non-durable and semi-durable goods retailers such as general dealers and clothing retailers are still supporting growth in sales, while durable goods retailers, such as those for furniture, were taking strain.
Retail sales were among the last pieces of data needed to calculate gross domestic product (GDP) estimates for the first quarter, due out on June 8. Even though the figures showed a weakening, retail sales were still in positive territory, supporting the view that GDP narrowly escaped a contraction in the first quarter.

The potential for contraction in GDP in the first quarter remained, however, as the industrial sector was in recession, while agriculture could see further shrinking from the drought, said Investec chief economist Annabel Bishop.
The risk from a contraction in GDP or extremely low growth is job losses.
SA lost 355,000 jobs in the first quarter — the largest decrease in six years.
Rising unemployment, food prices and interest rates are among reasons household disposable incomes are being eroded.

Another rate increase would hit over-indebted consumers hard, DebtBusters CEO Ian Wason said. Homeowners and landlords would want to pass on their increased bond repayments to consumers by increasing rentals, he added. "As rentals climb, consumers will have tighter budgets and will, therefore, spend less than before. The knock-on effect will be poor economic growth, which then leads to lower salary increases and higher unemployment," Wason said.
The Bank acknowledged previously that rate hikes, while good in tackling inflation, were costly to the economy.
It assumes that every 1% increase in rates slashes 0.5% from economic growth.

by Ntsakisi Maswanganyi /BDlive