ECONOMIC WEEK AHEAD: Two crucial measures of SA’s health are due
There are two major economic data releases due out this week — consumer inflation for May and the current account deficit for the first quarter of the year. Both will be scrutinised for clues as to whether SA’s economic recovery is gaining traction.
First up on Wednesday will be the consumer price index (CPI). Having ticked up to 4.5% year on year in April from just 3.8% in March, mainly as a result of the one percentage point VAT hike, economists are divided on whether CPI inflation slowed or accelerated slightly in May.
Though fuel prices climbed 3.5% in May, BNP Paribas economist Jeff Schultz is hoping the near absence of demand-side pressures in the economy will have allowed headline CPI inflation to have moderated slightly.
Citi Bank economist Gina Schoeman, however, expects consumer inflation to rise to 4.7% yea on year.
The big contributors should be food and transport, as only 0.35% of the categories in the consumer basket were surveyed during the month.
On Thursday, the Reserve Bank will release the June Quarterly Bulletin. Among the most anticipated data is the current account deficit for the first quarter of the year.
It is likely to have widened to more than 3% of GDP from the 2.9% shortfall recorded in the final quarter of 2017.
Last week’s US interest rate increase of 25 basis points, and the announcement of the end of quantitative easing by the European Central Bank, have upped the pressure on emerging-market economies with weak fundamentals. This includes SA, whose current account and fiscal deficits are among the largest in its peer group.
"A combination of weak exports, due to poor production and weaker external demand, and high imports will push the current account deficit higher," warns Rand Merchant Bank economist Isaah Mhlanga.
"The fact that the financing of that current account deficit has been through portfolio flows doesn’t help because these flows … chase returns and stability in an economy."
Schoeman forecasts a significant 1.1 percentage point widening of the deficit to 4% of GDP, equal to R188bn, compared with R137bn in the fourth quarter. Schultz is expecting a deficit of 3.7%.
Most of the deterioration is again likely to have been driven by the income deficit on the balance of payments. The potential forecast error is wide, however, since the outlook for dividend repatriation has become more complicated following SA’s disappointing first-quarter growth numbers and the more challenging global backdrop.
Better global growth and activity in the first quarter suggests that dividend payments from abroad should be up, while weak domestic corporate profitability should have limited offshore dividend payments during the same period.
The 0.5% of GDP trade deficit posted in the first quarter — SA’s first quarterly trade deficit in two years — will have added to the widening current account deficit.
A stronger rand and weaker industrial commodity prices had a negative effect on the country’s terms of trade in the first quarter.
Though a current account deficit of about 3%-3.5% of GDP is considered broadly acceptable, and is a substantial improvement on deficits of about 6% that SA regularly recorded five years ago, the rising trend bears watching.
"It does highlight that we need to keep close eye on SA’s deteriorating terms of trade," says Schultz. "If sustained, this could bring into question the rand’s relatively lower external vulnerabilities … given that the bulk of the deficit continues to be financed through portfolio investment and not foreign direct investment."