Picture: 123RF/NIRUT
Picture: 123RF/NIRUT

Producer inflation moderated to its lowest level in more than four years in November. 

The softening highlights the low levels of demand in SA’s economy, which contracted in the third quarter of 2019, with fears growing that it could slip into a recession as power utility Eskom continues rolling power cuts. 

The annual change in producer price inflation was 2.3% in November, down from 3% in October. It came in below market forecasts, which expected a reading of 2.9%, according to a Bloomberg survey. 

The last time it reached levels this low was in February 2015, and this is the seventh month of consecutive declines in the annual rate. Producer inflation — as measured by the producer price index (PPI) — records the change in prices of locally produced commodities.  

This period of easing has been attributed to the effects of lower fuel prices, which have declined substantially from the prices seen in the same period in 2018. Economists, however, expect these base effects to recede somewhat in the coming months. 

Coke, petroleum, chemical, rubber and plastic products, which account for more than 20% of the basket for final, manufactured goods, declined 2.2% year-on-year, with falls seen in both petrol and diesel prices.

Another “gloomier” factor in the recent slowdown of the PPI has been the “feeble, demand-side pressures in recent quarters” said Jacques Nel, chief economist for Southern and East Africa at NKC African Economics, ahead of the release. 

“We have seen both business and consumer confidence drop to dismal levels, and indications are that neither businesses nor consumers are very upbeat about future economic conditions either. This means that producers aren’t under pressure to produce, which then contains input costs,” he said. 

At the same time, Nel said, export demand has been insufficient to pick up the slack created by lacklustre domestic demand.  

The release comes after consumer price inflation declined to near nine-year lows on Wednesday. This has added to calls from some economists for the SA Reserve Bank to consider cutting rates at its next monetary policy committee meeting in January 2020. 

The Bank has, however, resisted pressure, and kept rates unchanged, as its modeling has not indicated that the slowdown in inflation will be sustained. It has also warned of the risks posed by the government’s weak fiscal position and the prospect of a credit ratings downgrade by Moody’s Investors Services, following the February budget. 

Moody’s is the last ratings agency to hold SA government debt at investment grade and a cut to junk could see as much as $8bn leave SA’s capital markets, according to the Bank’s estimates.