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24 April 2015
This week’s theme
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The data released over the past week confirmed that inflation globally is
bottoming. This is due to a recent oil price rebound as well as higher
consumer demand and less favourable base effects. SA is not different with
inflation having rebounded slightly in March off a four year low. The
implication of a gradually rising global inflation profile is that the focus of
monetary policy is likely to change from easing (due to deflationary fears) to
stabilisation and perhaps tightening in some areas. In the developed world it
is likely to be the US and UK which will lead the change towards interest rate
hiking either later this year or early next year. As for South Africa, a rising
inflation trajectory is likely to see the SARB begin hiking interest rates later
this year. Nevertheless, the high levels of debt locally and internationally imply
that rate hiking can be expected to be gradual and highly data dependent.
Alex Smith
Economist
FNB
011 303 5919
Alex.smith@fnb.co.za
Mamello Matikinca
Economist
FNB
087 343 1678
Mamello.matikinca@fnb.co.za
The key data in review
Date
Country
Economic Release/Event
Actual
Prior
17 Apr US
CPI (Mar)
0% y/y
0.1% y/y
19 Apr China
Bank Reserve Requirement Ratio
18.5%
19.5%
22 Apr SA
CPI (Mar)
4% y/y
3.9% y/y
23 Apr Eurozone Markit Composite PMI (Apr)
53.5
54
49.2
49.6
4.2% y/y
5.4% y/y
China
Markit Manufacturing PMI (Apr)
UK
Retail Sales (Mar)
Financial Market Indicators
Close
1-week
1-month
1 Year
54 686.54
0.9%
4.9%
15.8%
USD/ZAR
12.21
-1.3%
-3.4%
-15.5%
EUR/ZAR
13.09
-1.6%
-1.6%
10.4%
GBP/ZAR
18.36
-2.8%
-4.8%
-3.5%
Platinum US$/oz
1137.50
-2.0%
-1.6%
-19.0%
Gold US$/oz
1193.90
-0.4%
-0.9%
-7.0%
Brent US$/oz
64.79
0.8%
9.4%
-40.6%
SA 10 year bond yield
7.97
0.30bps
0.31bps
-0.41bps
All Share Index
Source: I-Net, FNB (data as at Thursday’s close)
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1
South African Economy
SA’s CPI increased marginally to 4% y/y in March, from
Higher food inflation, along with an expected gradual
February’s four year low of 3.9% y/y. March’s outcome
increase in oil prices and a persistently weak Rand/US
confirms that inflation reached its cyclical bottom in
Dollar exchange rate leads us to believe that SA inflation
February. The index in March was pushed up by higher
will move up slowly towards year-end. In 2016 adverse
inflation for alcoholic beverages and tobacco (+9% y/y
base effects are likely to push inflation above 6% for
from 8.2%), housing and utilities (+5.7% y/y from 5.6%),
much of the year.
education (+9.3% y/y from 8.7%) and transport (-5% y/y
from –6.3%). Meanwhile, inflation fell for food and non
alcoholic beverages (+5.8% y/y from 6.4%) as well as
miscellaneous goods and services (from 7.8% y/y to
7.5%).
Given this inflation trajectory and the vulnerable nature of
the Rand (as we approach interest rate hiking in the US
later this year), we expect the SARB to re-commence its
interest rate hiking in 2H 2015 with a single 25 basis
point hike. In 2016, we expect a further 50 basis points in
Inflation for alcoholic beverages picked up on the back
rate hikes. However, the magnitude and timing of rate
of higher sin taxes from this year’s budget. Housing
hikes will depend to a large extent on the timing of hikes
inflation was boosted by a higher than expected
in the US and the impact that this has on the Rand/Dollar
outcome for rental costs in March. This may be driven by
exchange rate.
improved household spending. Meanwhile, transport
inflation was supported by a 96c hike in the petrol price
during the month. Whilst we are encouraged to see food
inflation come down, it is likely to move higher in 2H
2015 given the recent increase in the domestic maize
price (following a drought in some parts of the country).
Figure 2: Selected sub-components of CPI
Figure 1: Headline CPI
% y/y
% y/y
16
12
14
10
8
12
6
10
4
8
2
6
0
-2
4
-4
2
-6
0
2007 2008 2009 2010 2011 2012 2013 2014 2015
CPI
SARB Target Band
-8
2013
2014
Food
Housing
2015
Transport
Source: Econostat, FNB
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2
Global Snapshot
The People’s Bank of China (PBoC) announced a 100
basis point cut to the reserve requirement ratio (RRR)
for large financial institutions to 18.5%. This is the
second RRR cut in 2015 and the largest since the
financial crisis. It complements two benchmark interest
rate cuts that have taken place since late last year. The
RRR dictates the level of reserves banks need to hold for
a given loan value. The cut in the RRR therefore allows
banks to lend more for a given level of reserves. The
PBoC took this decision in order to boost credit growth
and aggregate demand as the economy is slowing. We
are encouraged by the recent attempts to arrest China’s
slowing GDP growth. However, a declining working age
population, weak global demand, high private leverage
and excess capacity in the industrial sector suggest that
growth is likely to slow further over the coming years.
US CPI increased by 0% y/y in March, after falling by
0.1% y/y in February and 0.2% in January. The outcome
in March appears to confirm that US inflation has
bottomed. The main risk to this view is a renewed oil
price decline. In March CPI was boosted by higher
inflation for goods including: vehicles, apparel, furniture
and recreational items. These increases pushed core
inflation up slightly to 1.8% y/y. With headline inflation
so soft the Fed will not be in a rush to hike interest rates.
Figure 3: US CPI Growth
However, a core inflation outcome near the Fed’s 2%
target does suggest that once the low oil price moves into
the base for headline CPI (which will be in early 2016) we
could see it move towards 2% quite quickly. As such we
remain of the view that the Fed will begin hiking interest
rates before the end of 2015.
The Eurozone composite PMI fell by 0.5 points to a two
month low of 53.5 in April. Despite the slight pull back the
index remains above the average for 1Q 2015. Indeed the
index has increased consistently since late last year, so a
minor decline is not surprising. However, if the slowdown
continues it will be a worrying sign as the economy does
look as if it is in a gradual recovery phase. There were
some encouraging signs from the April data. In particular,
firms continued to grow their staff numbers as new order
growth slowed, but remained relatively elevated.
Moreover, backlogs of work continued to rise, raising the
possibility of production and employment gains in May.
Average selling prices for services continued to declining,
but did so at the weakest rate in nine months.
Manufactured goods prices actually rose for the first time
in 2015, supporting the view that Eurozone inflation has
bottomed. We remain of the view that GDP growth will
advance this year. However, the risk of a Greek debt
default remains and may weaken growth if it materialises.
Figure 4: Eurozone composite PMI
Index
% y/y
60
6
58
5
56
4
54
3
52
2
50
1
48
0
46
-1
44
-2
42
-3
2006
40
2008
2010
2012
2014
2011
2012
2013
2014
2015
Source: Bloomberg, FNB
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3
Sub-Saharan Africa
Zambia’s government announced this week that it will
return to a two-tiered mineral royalty and profit tax
regime, with royalties for both underground and open
cast mining set at 9%. Finance Minister Chikwanda
hiked mineral royalties paid on mining revenue to 20%
for open pit mines (from 6%) and 8% for underground
mines (from 6%) and cut mining profit taxes in the
National Budget last October. The move was unpopular
with mining companies as the tax on revenue adversely
affected on profits during periods like the present when
mineral prices are falling.
Whilst the tax changes will bring certainty to a sector
plagued by disputes, it is not yet clear whether the
mineral royalty tax at 9% will allow all mines to be
profitable at the prevailing copper price. Nevertheless, it
should help to support mining production and export
growth, both of which have been under significant
pressure of late. This in turn has resulted in a
deterioration of the trade balance (see figure 5). The
announcement has seen the kwacha exchange rate
stabilise following a period of significant weakness
earlier this year.
Figure 5: Zambia Trade Balance
Government revenue in Nigeria remained under
pressure as the combination of weak oil prices and
shutdowns of trunks and pipelines weighed on crude
revenue. In March, gross crude oil receipts declined by
22% m/m to N315 billion. Non-oil revenue also
disappointed, while an improvement in VAT collections
was not enough to cushion the drastic decline in oil
receipts. The persistent decline in revenue suggests that
Nigeria will have a difficult time meeting its fiscal targets.
This will likely increase the probability of Nigeria seeking
external funding to finance its weakening fiscal and
external position.
Figure 6: USD/NGN
210
K million
1600
200
1400
1200
190
1000
800
180
600
170
400
200
160
0
-200
2010
2011
2012
2013
Trade Balance
2014
2015
150
Jan 12
Aug 12
Mar 13
Oct 13
May 14
Dec 14
Source: Reuters, Global Insights, FNB
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The Week Ahead
SA | Looking for a trade improvement
Next week’s key local data releases will be the trade
balance, the producer price index (PPI) and private
sector credit extension (PSCE).
SA’s trade balance has disappointed over the past two
months, with large deficits of R24.2bn and R8.5bn being
recorded for January and February respectively. We had
expected to see the trade balance improve early this
year as the fall in the oil price should have reduced
import costs dramatically. However, it appears as if a
combination of weak export growth and significant
purchases of oil (to lock in the lower price) were behind
the surprisingly large deficits. In March however, we do
expect to see the trade deficit narrow from February’s
R8.5bn as the large import demand for oil is likely to
fade, while on the export side a boost is expected from
higher vehicle, precious metals and machinery exports.
PPI growth moderated further in February to a four year
low of 2.6% y/y as food and petroleum inflation continued
to slow. In March we expect PPI growth to remain stable at
around 2.6%.
PSCE has been very stable over the past year, ranging
between growth rates of 8 - 10% y/y. The make up of this
growth has also been relatively stable with corporate
credit extension accounting for much larger share than
household credit extension. We expect both trends to
persist in March as households appear to be in a
prolonged phase of deleveraging.
PLEASE NOTE THAT DUE TO THE PUBLIC HOLIDAYS
THERE WILL BE NO ECONOMICS WEEKLY NEXT WEEK.
THE FOLLOWING WEEK’S PUBLICATION WILL COVER
NEXT WEEK’S DATA
Data to watch out for next week...
Date
Country Release/event
28 Apr
UK
GDP (1Q 2015)
US
S&P/Case Shiller home price index (Feb)
US
29 Apr
30 Apr
1 May
Survey
Prior
-
2.4% q/q
4.7% y/y
4.6% y/y
Consumer Confidence
102.5
101.3
US
GDP (1Q 2015)
1% q/q
2.2% q/q
US
FOMC interest rate decision
0.25%
0.25%
Japan
BoJ Policy Statement
-
-
SA
Private Sector Credit Extension (Mar)
-
8.7% y/y
SA
PPI (Mar)
-
2.6% y/y
SA
Trade Balance (Mar)
-
-R8.5bn
US
PCE Deflator (Mar)
-
0.3% y/y
Japan
CPI (Mar)
-
2.2% y/y
US
ISM Manufacturing PMI
52
51.5
Source: Bloomberg (“Survey” is the consensus forecast)
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5
FNB SA Economic Forecasts
Economic Indicator
2011
2012
2013
2014
2015f
2016f
Final household consumption expenditure %yy
4.9
3.4
2.9
1.4
2.3
1.9
Government consumption expenditure %yy
1.7
3.4
3.3
1.9
2.0
1.2
Gross fixed capital formation %yy
5.7
3.6
7.6
-0.4
2.7
2.5
Total exports %yy
4.3
0.1
4.6
2.6
3.8
2.9
Total imports %yy
10.5
6.0
1.8
-0.5
4.5
3.8
Real GDP %yy
3.2
2.2
2.2
1.5
2.2
1.8
Current account (% of GDP)
-2.2
-5.0
-5.8
-5.4
-4.6
-5.0
CPI (headline) %yy
5.0
5.7
5.8
6.1
4.5
6.3
CPI (year end ) %yy
5.4
5.7
5.4
5.3
5.1
6.5
Repo rate (year end) %p.a.
5.5
5.0
5.0
5.75
6.00
6.50
Prime (year end) %p.a.
9.0
8.5
8.5
9.25
9.50
10.0
USD/ZAR (average)
7.3
8.2
9.6
10.8
12
12.3
Source: FNB
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Disclaimer: The information in this publication is derived from sources which are regarded as accurate and reliable, is of a general nature only, does not constitute advice and may not be applicable to all circumstances. Detailed advice should be obtained
in individual cases. No responsibility for any error, omission or loss sustained by any person acting or refraining from acting as a
result of this publication is accepted by Firstrand Group Limited and / or the authors of the material.
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