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By Cees Bruggemans
As SA output growth decelerated in 1Q15, from 4.1% to 1.3% annualised, real SA spending growth accelerated, from 0.3% to 3.4%, SARB quarterly bulletin data showed today. How now, Holy Mackerel?
Two reasons, really.
Summer inflation subsided drastically, as petrol and diesel pump prices sunk (can barely remember it now…) and food inflation moderated, between them pulling CPI inflation down to 3.9% in Feb15, thereby boosting real household incomes and its purchasing power.
Especially non-durable consumption spending accelerated strongly (to nearly 5%) and imports rose.
In contrast, agricultural crops wilted under drought and manufacturing output fell, with export volumes under pressure.
Thus the output growth deceleration and spending growth acceleration was squared with an increase in the foreign trade deficit.
Neither the boost to real income from lower inflation or the living off larger trade deficits is sustainable longer term.
That we still got a drop in the current account deficit over the balance of payments, falling to 4.8% of GDP from 5.1%, was due to an even bigger falloff in the services shortfall as our dividend payments overseas fell off.
So the overall impression improved nicely, even as the underlying trade data deteriorated.
With foreign investment inflows having drastically fallen off, our funding of the current account deficit is heavily dependent on portfolio flows and sentiment. It creates downside exposure for the Rand and by implication our inflation.
Households have already experienced starkly in recent months how fickle these short-lived summer dalliances can be.
Inflation has started to reverse with a vengeance, still only 4.6% but projected to reach 6.8% or even top 7% by early next year as the petrol and diesel pump prices have risen sharply anew in recent months on account of the weakened Rand, and now increasingly having to be compared with very low base levels a year ago. Simultaneously, food inflation has started to accelerate too.
With formal employment growth dismal, only +0.2% during the past year, our households real income is heavily impacted by abrupt inflation changes.
With nominal household gains quite steady (Andrew Levy reporting 8% wage settlements yoy), the inflation subsidence over the past summer gave a nice boost to our household real incomes, most of which was spent very basically.
With the sharply higher inflation now looming over the coming summer, with no expectation of higher employment levels, and credit access very limited indeed, households can expect real incomes to be hit hard, and this translating into new real spending subsidence as growth wanes.
Thus hardship for many households comes back into focus. And this is before higher taxes, higher electricity charges, higher interest rates, e-tolling and higher municipal charges. These are tough times for many.
*Cees Bruggemans is consultant economist at Bruggemans & Associates
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