Thursday, January 23, 2020

Is South Africa flirting with Stagflation?

11:05   Thursday, 23. January 2020

By Mmamoloko E. Boshomane
eboshomane7@gmail.com


South Africa Economic growth contracted by 0.6% in the third of 2019 after pencilling 1.0% in the second quarter of 2019. Following MPC’s announcement to unanimously concurring on cutting the lending rates by 25 basis points to leave the repo rate at 6.25% on their first meeting of the new decade, the South Africa Reserve Bank Governor Lesetja Kganyago highlighted that the bank also have downgraded their GDP growth forecast to 0.4% after initial assessment had put SA economic activity prospects at a slight 0.5%. The global financial institutions such the International Monetary Fund has similar sentiments, slashing out their initial forecasts by 0.3 percentage points to expect our economy to grow at 0.8%, further expecting the SA economy to expand by a mere 1% in 2021. These figures a way below the sub-saharan average which grew by 3.3% in 2019 and expected to add 3.5% in 2020/21. Moreover, the fourth quarter of 2019 consumer confidence sitting at negative 7, the lowest level since Q4 2017 and an average of 1.42 points between 1982 to 2019. The said to be looming downgrade to the non-investment grade by the only rating agency to still have South Africa on the investment grade Moody’s, could possibly be litting fireworks on a tail of a sober dog when it comes to investors as the government needs foreign investments to facilitate social and infrastructural development and structural reforms to improve productive capacity and expand economy and open the economy up to new markets. Moody’s downgraded SA investment outlook to negative but still an investment grade from the agape mouth of non-investment grade.

At the of the causes of this economic quirkmire is the power outages and policy uncertainty tied to the slow pace of structural reforms that has been taking its toll on the economic activity. Joblessness is swiftly spiralling out of control reaching 29.1% before the end of last year, 0.1 percentage points increase from Q2 figure. STATSSA late in 2019 reported that four out of ten industries saw escalation in their labour force. Community and social services industry went up by 56 000, agriculture and mining both at 38 000 and private households increasing by 35 000 and surprisingly, one of the sector that a country needs to accentuate on as one of the catalyst for economic stimulation and structural reforms, coinstruction which will be pivotal in advancing infrastructural development was nowhere to be found. in the green in fact, it is amongst those that downsized their staff capacity, with 24 000 job losses behind another lion which is supposed to be playing an integral and colossal role in perking up activity manufacturing with 30 000 losses. Trade and Utilities industries left 21 000 and 18 000 households without a bread on the table, respectively.

Price levels have been threatening to gravitate to below the bottom level of the SARB’s target of 3%-6%. Before recording 4%  rise in December 2019, November inflation was 3.6%. On annual scale, the price level remained subdued in 2019 at an average of 4.1% lower than the averages of the previuos two years. Towards mid-year, it was reported to be hovering around the midpoint of the SARB target at 4.5% in May before hitting its lowest plateau in a decade( since December 2010) of 3.6% in November.

It is still unclear whether the boiling tensions between US and Iran would end in am amicable fashion or War after the  killing of the Iranian military leader for which US President Donald Trump quickly claimed responsibility. The  oil price appeared to have felt the most impact with UK crude oil jumping to $63 and one analysts immediately suggested that the oil price could parachute as high as $80. With Tehran having promised that form of voilent retribution, this would likely contaminate the global oil market with eye-watering implications on South Africa’s endeavors to stimulate activity. If this leads to violent animosity between the two nations and significantly loading on the oil market, actually causing upward pressure on oil prices which would potentially give birth to hindrances in the way of global growth. Global oil prices increases could also drip down to the local oil prices before local producers and corporates counteract the increase in cost of production ot transportation with an increase in price for consumers who will be ultimate bearer of this dilemma- As a result,  general price levels surge up amid sluggish growth if not stagnant and joblessness that promises to be perennial and perpetual socio-economic ill in South Africa

Through the issues discussed above, one can easily define and spot stagflation on the horizon for the continent’s second largest economy. Stagflation is economic period where inflation is high, growth is inert and unemployment is high. South Africa already has two (sluggish growth and unemployment rate is high) and with likelihood of the third(inflation) more than not. There is no prospect of a fast growing economy ,efforts to implement policies and measures to pave a way for efficient structural reforms and sustainable growth are retard and if what Iran has vowed and sworn in retaliation of the death of Iran Senior Military leader General Qassem Soleimani is what we should go by, this would not only arrest global growth, but prices levels might find another spike up after attacks on Saudi oil refineries later towards the end of last year. Following the killing of Soleimani, the oil price has spiked to $70 per barrel after the first week of January 2020. After a spike, the question is how long will the price would remain on the upward trajectory provided the advent US and Iran War does come and persist? Shouldn’t we start preparing our hospitality for stagflation?

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