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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.
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.
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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.
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.
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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.
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.
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Medium-Term Budget Policy Statement Snapshot
28 October 2020
Further ramp up in debt to GDP projections confirms Moody’s & Fitch credit rating downgrades in November, S&P is a risk, bringing universal single B ratings closer. The MTBPS banks on growth & expenditure cuts.
2020’s Medium–Term Budget Policy Statement (MTBPS) has projected a further deterioration in government’s debt to GDP projections and fiscal deficits. Over the medium-term, gross debt is projected to now stabilise at 95.3% of GDP in 2025/26, from 87.4% of GDP for 2023/24 that was outlined in June’s Supplementary Budget Review (SBR).
The rating agencies are likely to downgrade SA on the back of this budget, as the key objective of any credit rating agency is to assess ability to repay debt, and SA is evincing even further fiscal slippage from the June SBR estimates. The deficit is now expected at 15.7% of GDP this year, from 6.4% of GDP last year in 2019/20.
The 2020 MTBPS has outlined substantial cuts to its non-interest expenditure projections (R300bn over three years) with the majority of the cuts to be applied to the wage bill (not social welfare or infrastructure), while acknowledging that there will be likely legal consequences to cutting the wage bill, and to its proposed three year wage freeze.
While these expenditure cuts are largely in line with the expectations from the markets, it does not nullify the massive rise in South Africa’s future debt quantum announced in June, and with a further elevation of debt projections to even closer of 100% (above 100% with SOE debt the state guarantees) this is not seen as sustainable for an EM.
The rand has weakened in response, to R16.50/USD, as SA’s credit risk, which is the perceived risk of default, has risen further, as the sheer quantum of debt issuance is projected to just climb further, which will increase borrowing costs (interest expenditure), and likely lift bond yields, with foreign appetite for SA debt dwindling.
That said, the budgeted figures today do present more realistic projections for SA both on the debt and fiscal deficit side, as does the realism that severe tax hikes will cause slower economic growth, and not yield what is needed to plug the revenue gap given the very low tax buoyancy ratio.
Today’s budget is not a full austerity budget, but it certainly contains austerity with very substantial expenditure cuts detailed over the MTEF (2021/22 to 2023/24), and there is a notable shift in expenditure from consumption to infrastructure for the purpose of enhancing growth.
The rating agencies are likely to downgrade SA on the back of this budget, as the key objective of any credit rating agency is to assess ability to repay debt, and SA is evincing even further fiscal slippage from the June SBR estimates. The deficit is now expected at 15.7% of GDP this year, from 6.4% of GDP last year in 2019/20.
The 2020 MTBPS has outlined substantial cuts to its non-interest expenditure projections (R300bn over three years) with the majority of the cuts to be applied to the wage bill (not social welfare or infrastructure), while acknowledging that there will be likely legal consequences to cutting the wage bill, and to its proposed three year wage freeze.
While these expenditure cuts are largely in line with the expectations from the markets, it does not nullify the massive rise in South Africa’s future debt quantum announced in June, and with a further elevation of debt projections to even closer of 100% (above 100% with SOE debt the state guarantees) this is not seen as sustainable for an EM.
The rand has weakened in response, to R16.50/USD, as SA’s credit risk, which is the perceived risk of default, has risen further, as the sheer quantum of debt issuance is projected to just climb further, which will increase borrowing costs (interest expenditure), and likely lift bond yields, with foreign appetite for SA debt dwindling.
That said, the budgeted figures today do present more realistic projections for SA both on the debt and fiscal deficit side, as does the realism that severe tax hikes will cause slower economic growth, and not yield what is needed to plug the revenue gap given the very low tax buoyancy ratio.
Today’s budget is not a full austerity budget, but it certainly contains austerity with very substantial expenditure cuts detailed over the MTEF (2021/22 to 2023/24), and there is a notable shift in expenditure from consumption to infrastructure for the purpose of enhancing growth.
More detail
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About the author
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.
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