ECONOMIC WEEK AHEAD: Waning inflation is a sign of an economy under pressure
Consumer inflation will be the most important economic data release of the week. Most economists expect the headline figure to have dipped just below the midpoint of the Reserve Bank’s inflation target range, but a surprise drop cannot be ruled out.
London-based Capital Economics is putting its head on a block, forecasting that consumer inflation fell to a six-month low of 4.0% in July, having averaged 4.4% over the past quarter.
This is far below the consensus estimate that the consumer price index (CPI) moderated only slightly to 4.4% year on year from 4.5% year on year in June.
A large undershoot in the CPI would signal that demand in the economy is even weaker than previously thought. This would strengthen the odds of another interest rate cut when the Bank meets in September, though markets are not expecting it to move again until early 2020.
Much will depend on whether recent rand weakness above R15/$ is sustained.
Capital Economics senior emerging markets economist John Ashbourne thinks a combination of political shocks, a wide current account deficit and an increasingly difficult global backdrop will continue to weigh on the currency.
The economic research consultancy has cut its end-year forecast from R15/$ to 16.50/$. However, Ashbourne still thinks inflation will ease in the third quarter given how weak the pass-through from movements in the currency into domestic prices has become.
Forecasting the latest CPI figure is complicated by the fact that municipalities were awarded an average electricity price increase of 15.63% from July.
This added an estimated 0.2 percentage points to headline inflation in July, but this was more than offset by a sharp 5.7% year-on-year fall in fuel prices during the month, according to Ashbourne.
“If we’re right about inflation, another decline would strengthen our view that policymakers will have a small window to cut their key rate from 6.50% to 6.25% in September,” he says.
Absa economist Miyelani Maluleke is almost as bullish on inflation. He expects the CPI to ease to 4.2% year on year in July and to track around 4.5% through to the year-end, mainly due to base effects on fuel.
“However, these base effects will wear out in the first quarter of 2020 and we could see headline CPI inflation rise to about 5.5% by that time,” he warns.
Investec economist Kamilla Kaplan expects consumer inflation to average 4.6% year on year in 2019.
“Slowing wage growth, the moderation of inflation expectations to multiyear lows, sluggish economic growth and weak pass-through from rand depreciation [all] point to an absence of meaningful upside inflationary pressures,” she says.
On Wednesday economists will be scrutinising the Reserve Bank’s June leading business cycle indicator for signs of a near-term growth recovery, given that much of the recent data suggests that growth has picked up after the first-quarter contraction.
The indicator disappointed in May, declining by -1.6% month on month and by -1.9% year on year, the eighth consecutive month of year-on-year declines.
FNB Commercial Property Finance strategist John Loos expects the indicator to contract again slightly in June, though not as severely as in May, showing that the economy remains under pressure despite a few brighter spots.