South Africa's inflation rate is expected to rise

06 May 2021

Annabel Bishop

Chief Economist | Investec

Inflation is anticipated to rise in the near term, albeit off a low base, but should remain contained within the inflation target over the next five years

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The detrimental economic effects of Covid-19-induced lockdowns drove a -7.0% y/y collapse in GDP las year. Inflation consequently dropped to an average of 3.3% y/y, with levels falling as low as 2.1% y/y in May, the lowest CPI reading since September 2004. A steep decline in fuel prices, on the back of plunging oil prices, coupled with depressed domestic demand, suppressed the inflation rate for most of 2020. Inflation remained relatively subdued during Q1.21, averaging 3.1% y/y, but base effects will push up the CPI reading for the remainder of the year. 
 
The BER’s Q1.21 inflation expectations survey, released quarterly, sees average inflation rising to 3.9% y/y (previously 4.2% y/y) in 2021 and 4.2% y/y (previously 4.5% y/y) in 2022. Average five-year expectations among all social groups edged marginally lower to 4.6% from 4.7% indicated in the preceding survey. 
 
The results of the BER’s inflation expectations survey, while still indicating a notable lift in the inflation trajectory, are below the SARB and Investec’s forecasts. Specifically, the SARB, while viewing the overall risks to the inflation outlook as balanced, expects inflation to climb to an average of 4.3% and 4.4% in 2021 and 2022 respectively. Investec is anticipating headline CPI to reach an average of 4.2% in 2021 and then increase to an average of 5.0% (2022), above the mid-point of the inflation targeting band, supported by a lift in demand as the global recovery gains momentum. The emergence of new, potentially drug-resistant strains of the virus, with additional waves of infection, however, remains a risk to the outlook.

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You may also be interested in the following updates in May

Government Finance: 3 May

Government Finance: 3 May

Budget deficit notably larger than previous fiscal year
trading

Surplus on the trade account widened notably

30 April 2021

Trade surplus increased to R52.8bn in March, supported by a 28.9% m/m increase in exports.

The surplus on South Africa's merchandise trade account increased markedly to R52.77bn in March, from R31.22bn (revised) in February. The outcome was well above Bloomberg consensus expectations of a R23.6bn surplus and was underpinned by a 28.9% m/m increase in exports to R168.29bn, ahead of the 16.3% m/m lift in imports to R115.52bn.
 
March’s outcome is supported by results from the JP Morgan global manufacturing PMI for March which indicated that international trade flows “(p)icked up pace, with growth of new export business the steepest since January 2018”.
 
Measured on an annual basis, March’s R52.77bn surplus is a notable improvement from the R21.41bn trade balance surplus logged last year.
 
A review of the trade highlights released by SARS, suggests that the lift in exports was broad based, with all key categories increasing on a month-on-month basis. Notably Precious metals and stones exports grew by 41.0% m/m. Similarly, all major import segments rose, when compared to the previous month.  
 
Estimates by the World Trade Organisation (WTO), suggest that the volume of world merchandise trade could grow by “8.0% in 2021 after having fallen 5.3% in 2020” and thereafter decelerate to 4.0%. However, they do caution that the “relatively positive short-term outlook for global trade is marred by regional disparities, continued weakness in services trade, and lagging vaccination timetables, particularly in poor countries”.

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You may also be interested in the following updates in April

CPI Update: 21 April

Tourism Update: 21 April

Rand Note: 19 April

Covid-19 Note: 16 April

Retail Update: 14 April

Mining Update: 15 April

Manufacturing Update: 8 April

Electricity Update: 1 April

CPI Update: 21 April

Fuel price inflation drives March CPI increase

Tourism Update: 21 April

The contraction in income derived from the tourist accommodation sector accelerated in February to -74.5% y/y

Rand Note: 19 April

Rand leads the resurgence of emerging market currencies

Covid-19 Note: 16 April

Ten days on SA has not seen the feared third wave materialise post Easter

Retail Update: 14 April

Retail sales grew as lockdown restrictions were eased

Mining Update: 15 April

Mining production rose by 0.8% y/y in February, buoyed by iron ore

Manufacturing Update: 8 April

Contraction in manufacturing production eased

Electricity Update: 1 April

Electricity generation and consumption fell by -4.3% y/y and -3.8% y/y respectively in February
factory

Economic recovery and debt outlook correlate directly to lockdown levels

30 March 2021

Data continues to show that businesses and consumers are highly sensitive even to limited restrictions

South African businesses are not resilient to the lockdown restrictions, and neither are consumers. That's clear from the latest economic production data, which is still well below the first quarter of last year.
 
GDP in the first quarter of 2021 was at R3.1tri in real terms, while fourth quarter 2020 GDP only reached R3.0tr. We're not expected regain pre-Covid production levels until 2024, although reimposition of harsh lockdown restrictions would delay this.
 
Globally, economic recovery is slow too, and the World Bank continues to reiterate this, highlighting that “although global economic output is recovering from the collapse triggered by COVID-19, it will remain below pre-pandemic trends for a prolonged period.”
 
Furthermore, the World Bank warns that “the pandemic has exacerbated the risks associated with a decade-long wave of global debt accumulation. It is also likely to steepen the long-expected slowdown in potential growth over the next decade.”
 
The IMF adds that the “world faces severe problems of debt sustainability in the wake of the coronavirus crisis that have not been properly understood or addressed, … which threaten to tip developing countries into a rising wave of hunger, poverty, social unrest and conflict.”
 
“The fact that only six countries had defaulted on their foreign debts last year — Argentina, Belize, Ecuador, Lebanon, Suriname and Zambia... created the illusion of stability and a misperception of the seriousness of the situation. Large, middle-income developing countries such as Brazil and South Africa have borrowed heavily from domestic lenders rather than from foreign investors, at interest rates much higher than those available to rich countries, making the dangers less visible than in previous emerging market debt crises”.
 
South Africa is facing further credit rating downgrades, potentially on 7th May from Moody’s, if not sooner from Fitch (S&P country review is on the 21st May), risking the loss of its BB- rating, and so also risking marked rand weakness and higher borrowing costs.  
 
We have not changed our economic growth outlook substantially, and still expect GDP to rise by around 3.0% y/y this year, with employment rising at the same rate. However, should a third wave of infections after Easter precipitate tighter lockdown restrictions, even this muted pace of recovery would be unlikely.

More detail

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You may also be interested in the following updates in March

Trade Update: 31 March

Employment Update: 30 March

MPC Update: 25 March

Rand Note: 23 March

Oil Note: 17 March

Retail Update: 17 March

Manufacturing Update: 11 March

Mining Update: 11 March

GDP Update: 9 March

Electricity update: 4 March

Commodity Currencies Note: 4 March

Vehicle Sales Update: 2 March

Trade Update: 31 March

The surplus on the trade account widened to R28.96bn in February, on increased export activity

Employment Update: 30 March

Non-farm employment increased modestly on a q/q basis in Q4.20, but was down -5.8% y/y

MPC Update: 25 March

SARB keeps rates unchanged

Rand Note: 23 March

The rand hangs onto some of its gains after its very rapid strength following last week’s FOMC meeting

Oil Note: 17 March

South Africa faces yet another fuel price hike this year

Retail Update: 17 March

The contraction in retail activity accelerated to -3.5% y/y in January, weighed down by tighter lockdown restrictions

Manufacturing Update: 11 March

Manufacturing production fell by -3.4% y/y in January

Mining Update: 11 March

GDP Update: 9 March

Electricity update: 4 March

Electricity generation and consumption fell in January

Commodity Currencies Note: 4 March

The rand remains on track to average R15.00/USD this quarter, with commodity prices at all-time highs

Vehicle Sales Update: 2 March

February new vehicle sales dropped 13.3% y/y

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farm

Headline producer price inflation rose to 3.5% y/y in January 2021

25 February 2021

Headline producer price inflation rose to 3.5% y/y in January, from 3.0% y/y in December 2020, above Bloomberg consensus expectations of 3.2% y/y.

Manufactured food price inflation increased to 7.2% y/y from 6.9% y/y recorded in December. The food products, beverages and tobacco products category which makes up just over 36.0% of the PPI basket thus added 2.1% to the headline reading, from 1.9% previously.

 
Price lifts within the oils and fats, and starches, starch products and animal feeds segments were the most pronounced, while meat price inflation dropped further to 6.9% y/y from 7.2% y/y and 9.7% y/y in December and November respectively, “in part, due to increased supply following slightly higher slaughtering activity in December 2020,” according to Agbiz. Food price inflation is still expected to average 5.0% y/y for 2021.
 
The January fuel price increases of 40c/litre for petrol and 54c/litre for diesel saw the annual rate of contraction in the coke, petroleum, chemical, rubber and plastic products grouping, in which fuel price dynamics are captured, decelerating to -2.1% y/y from -3.9% y/y in December. This category which makes up a marked 19.4% of the PPI basket accordingly detracted just -0.4% from the annual topline PPI reading, versus -0.8% previously.
 
Both PPI and CPI are expected to rise in 2021, from the low levels recorded in 2020, but should remain contained, underpinned by a likely still muted demand environment. Indeed, while GDP growth is expected to pick-up, supported by the vaccination rollout it will be protracted.

More detail

Read the full report

You may also be interested in the following updates in February

Budget Note: 24 February

Labour Update: 23 February

Tourism Update: 23 February

Building Update: 18 February

Budget Preview: 17 February

CPI Update: 17 February

Rand Note: 15 February

Vehicle Sales Update: 1 February

Trade Update: 1 February

Budget Note: 24 February

2021 Budget proves better than markets expected

Labour Update: 23 February

The unemployment rate climbed to 32.5% in the fourth quarter of 2020

Tourism Update: 23 February

Income derived from the tourist accommodation sector fell at a decelerated rate in December, but remains depressed

Building Update: 18 February

Residential builder confidence climbs notably in Q4.20

Budget Preview: 17 February

a significant improvement in SA's debt projections is unlikely

CPI Update: 17 February

Fuel price increases in January contributed to the slight lift in headline CPI inflation

Rand Note: 15 February

The rand is basking in the glow of global market confidence

Vehicle Sales Update: 1 February

New vehicle sales down -13.9% y/y in January

Trade Update: 1 February

The surplus on the trade account narrowed somewhat to a still sizeable R32.00bn in December
factory

GDP and industrial production are expected to fall

26 January 2021

Both GDP and industrial production are expected to fall by close to -5.0% y/y in Q4.20, evidencing no quick, V shaped recovery for SA, with all those who lost their jobs in Q2.20 still not likely re-employed either 

Yesterday saw the release of the Bloomberg economic consensus, and incidentally showed that the expected GDP outcome for 2020 is -7.3% y/y, the same figure we published at the start of this month, although the expectation for 2021 is 3.5% y/y versus our 2.9% y/y.
 
With three quarters worth of data already published for 2020, only the Q4.20 reading remains outstanding, and we forecast a lift of 2.5% qqsaa (quarter on quarter, seasonally adjusted, annualised), after Q3.20’s 66.1% qqsaa rebound.
 
While the incoming data for Q4.20 does indicate a lift over Q3.20, it is not showing a very strong rebound, as Q3.20’s outcome occurred off the statistical lows of Q2.20, which is not occurring again in Q4.20.
 
While Q2.20 GDP fell by -51.7% qqsaa (annualisation essentially gives you the growth outcome if the same level of GDP occurred for the whole year instead of one quarter), without annualisation it dropped by -16.6% between Q1.20 and Q2.20.
 
The -16.6% drop in GDP in Q2.20, means the actual value of GDP in Q2.20 was 83.4% of the Q1.20 amount of R3.1trillion (in real terms), so Q2.20 came out at R2.6trillion, with a loss of R0.52trillion in production, or R520billion.
 
Following on from this, Q3.20’s annualised rise of 66.1% qqsaa sounds a lot, but it is only a lift of 13.5% q/q. Consequently, the Q3.20 GDP, at R2.96trillion, is only 94.6% the size of Q1.20 GDP and so the production lost in Q2.20 GDP was not fully recovered in Q3.20.
 
With a lift of 2.5% qqsaa in Q4.20 expected, or about 0.7% q/q (not annualised), GDP only rises to R2.98trillion, again still not reaching the level of Q1.20’s outcome of R3.1trillion and showing that there is no V shaped recovery for South Africa.
 
Even a lift of 3.5% qqsaa in Q4.20 GDP will still give you R2.99trillion, and so once again no return to the R3.1trllion level of production in Q1.20. This is the same for the components of GDP and indeed, GDP is only expected to reach R3.13trillion by the turn of the year into 2024.
 
For Q4.20 only two months’ worth of data is generally available, and industrial production is showing a lift of about 3.8% on the previous period, but is down -4.6% y/y for the first two months of Q4.20. This would tally with the drop of close to -5.0% y/y expected for Q4.20 GDP.

More detail

Read the full report

You may also be interested in the following updates in January

PPI Update: 28 January

Rand Note: 25 January

MPC Update: 21 January

Retail Update: 21 January

Inflation Rate Note: 20 January

CPI Update: 20 January

Mining Update: 19 January

Tourism Update: 18 January

Covid-19 Note: 15 January

Oil Note: 13 January

PPI Update: 28 January

Headline producer price inflation held steady in December

Rand Note: 25 January

Rand continues to stay mainly above R15.00/USD

MPC Update: 21 January

SARB split decision: repo rate unchanged

Retail Update: 21 January

A bleak November for South African retailers

Inflation Rate Note: 20 January

South Africa's inflation trajectory is set to rise

CPI Update: 20 January

Fuel price cuts and modest growth in housing rentals had a slight dampening effect on headline CPI in December

Mining Update: 19 January

Mining production down 11.6% y/y in November

Tourism Update: 18 January

Tourist accommodation statistics declined at a decelerated rate in November

Covid-19 Note: 15 January

Covid-19 vaccine yet to land in SA as second wave outstrips the first

Oil Note: 13 January

SA fuel price hike on the cards as oil price rebounds
SA Rand

The rand consolidates after its strong appreciation trend from April

7 December 2020

The rand remains around R15.25/USD to R15.30/USD since mid-November, with the domestic currency unlikely to see much strength beyond R15.00/USD on a sustained basis

The rand averages R15.93/USD so far this quarter. Since mid-November it has averaged R15.31/USD, but failed to make further, sustained gains, as markets’ have discounted the expected positive impact of vaccinations on economic recovery.
 
Further marked advancement in the rand will require additional, substantial good news which has not already been discounted, and indeed the rand is still at risk of depreciation in the year ahead, and will remain subject to the risk of high volatility as well.
 
While most of the news on vaccines has already been discounted by financial markets, structural problems remain to trip up sentiment, particularly the build-up of sovereign debt in most countries over the past year, while economic recoveries are by no means complete.
 
Additionally, vaccines themselves are not the panacea, with a lengthy time period still needed for the global population to be vaccinated in total, which could take the course of 2021, if not into 2022 as well to effectively reach all the populations of poor nations as well.
 
Strong policy support measures will consequently still be needed through 2021, and hastily removing these will create an even more uneven recovery than is already occurring, with a patchy revival still expected both between economies, and within economies’ sectors as well.
 
Risk-on sentiment cannot be taken for granted in global financial markets. With the Northern Hemisphere autumn, winter and spring typically a risk-on period anyway, the positive sentiment that has supported the rand cannot be relied on to continue throughout 2021.
 
Interest rates are expected to remain low globally for a very protracted period, and markets have factored this in, adding to the impetus for recovery in financial market indicators that has occurred, as have expectations of contained inflation and additional fiscal stimulus.
 
However, very low interest rates discourage lending, despite strong appetite for borrowing, particularly when policy rates are zero bound or close to it. This is a risk to the speed and sustainability of global recovery, as is disregarding needs in the face of climate change.
 
Additionally, trade tensions are on the radar for 2021, with the US, even under a presidential change, still looking to contain trade with China via sanctions if its requirements are not met, although markets hope less aggressively than occurred under Trump.

More detail

Read the full report

You may also be interested in the following updates in December

Gold Update: 9 December

GDP Update: 8 December

Gold Update: 9 December

Commodity prices continue to lift on vaccine optimism

GDP Update: 8 December

GDP rose by an unprecedented 13.5%

About the author

Annabel Bishop

Annabel Bishop

Chief Economist of Investec Ltd

Annabel holds an MCom Cum Laude (Economics and econometrics) and has worked in the macroeconomic, risk, financial market and econometric fields, among others, for around 25 years. Working in the economic field at Investec, Annabel heads up a team, which focusses on the macroeconomic, financial market and global impact on the domestic environment. She authors a wide range of in-house and external articles published both abroad and in South Africa.


PREVIOUS ECONOMIC UPDATES:

You may also be interested in the following updates in November

Rand Note: 30 November

CPI Update: 25 November

Tourism Update: 24 November

Liquidations Update: 24 November

MPC Update: 19 November

Retail Update: 19 November

Mining Update: 13 November

Manufacturing Update: 10 November

Electricity update: 5 November

PMI Update: 2 November

Rand Note: 30 November

Rand consolidates above 15/USD

CPI Update: 25 November

CPI inflation lifted to 3.3% y/y in October

Tourism Update: 24 November

Tourist accommodation statistics fell at a decelerated rate in September

Liquidations Update: 24 November

Liquidations continued to increase on a three-month rolling basis in October

MPC Update: 19 November

SARB opts to keep the repo rate unchanged

Retail Update: 19 November

The contraction in retail activity eased to -2.7% y/y in September, however demand remains subdued.

Mining Update: 13 November

The contraction in mining production continued to ease in September to -2.8% y/y

Manufacturing Update: 10 November

Contraction in manufacturing sector decelerates

Electricity update: 5 November

Electricity generation and consumption fell further in September

PMI Update: 2 November

SA manufacturing activity continued to strengthen in October

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