A slight easing of pressure

YOU know you’re in economic trouble when you start quibbling about variations on close-to-zero growth.

Click to watch: Economic trouble when you start quibbling about variations on close-to-zero growth.

So, when the Reserve Bank raises its 2016 growth forecast from zero to 0.4% it shouldn’t be that much cause for celebration. At this level, SA is still going backwards at a rapid rate. Given that population growth is about 1.7%, we are all, on average, getting poorer.

At least the Bank’s forecasts, disclosed in Thursday’s statement by the monetary policy committee, are a little happier, with forecasts for the next two years also increased, albeit only by a marginal 0.1 percentage point.

Its inflation forecasts are looking a little better, too, with inflation now expected to peak at a "notably" lower level, in the words of governor Lesetja Kganyago — 6.7% later in 2016 compared with 7.1% previously — and to make an earlier sustained return to inside the target range.

The August figure of 5.9% was temporary, with inflation expected to climb again later in 2016 as food price inflation reaches a new peak. But the stronger rand has been helping, as has the fuel price, and with the rains expected soon, the outlook has improved.

It’s always a challenge to decipher exactly what the committee means when it makes carefully considered comments along the lines of "we may be close to the end of the tightening cycle, if current factors remain in place".

But the bottom line seems to be that if everything carries on looking as it does now, the "pause" the committee has been talking about lately could last a long time, without need for further interest rate hikes.

SA’s growth problem is deeply structural rather than cyclical and interest rates aren’t likely to make much difference one way or the other to our growth prospects, but if the committee finds itself in a position to keep them on hold rather than hiking them, that should be mildly good for growth and for confidence.

Of course, that could very easily be derailed by a ratings downgrade or another round of political insanity that causes the rand to tank. The moderating outlook could be derailed, too, by global factors or local weather conditions.

No wonder the Bank chooses its words cautiously and keeps the door open to further hikes. No wonder that it was at pains on Thursday to make it clear that no one should expect a cut in interest rates anytime soon. That was the meaning of: "The bar for monetary accommodation … remains high."

Explaining this, the committee said it "would need to see a more significant and sustained decline of the inflation trajectory to within the target range", if it was to turn to a more "accommodatory" stance.

That may be hard to swallow, but it is entirely appropriate. SA’s economy doesn’t just have structurally low growth but also structurally high inflation. That reflects rigid wage bargaining, which doesn’t respond to unemployment trends or the economic cycle, as well as rigid product markets and regulatory environments that tend to deter robust competition or dynamic pricing.

And though SA’s inflation rates are much lower than they were before inflation targeting was introduced in the early 2000s, they have hardly ever fallen even close to the bottom of the 3%-6% target range and have generally been closer to the top. That’s partly because nobody expects 3% inflation — and the Bank frequently expresses concerns about inflation expectations being stuck near 6%, so wage-and price-setting tend to be based on that.

The economy’s low-growth woes will start to be tackled only when policymakers show some appetite to effect the reforms that have been suggested many times. Thorough reforms to the way SA’s economy operates are necessary if inflation is to fall to much lower levels and make space for lower interest rates.