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STAGFLATION (stagnation plus inflation) is defined as the situation where a country persistently suffers from both high inflation and unemployment (Oxford dictionary of Economics) and in which there is a lack of growth in consumer demand and business activity.
Now I do not wish to suggest that we are experiencing stagflation, but it does seem a possibility.
Firstly, unemployment is high, that much we all know, and inflation is above the 3% to 6% target band. So if inflation does continue to face upward pressure – which I expect it will – then there is certainly the chance of us ‘stagflating’.
Secondly, I expect upward pressure on inflation because of the Association of Mineworkers and Construction Union (Amcu). Amcu is leading the strike in the platinum sector and is at present trying to get one going in the gold sector as well.
Although the strike in the gold sector is currently prevented till the final ruling is made, a date for the verdict has yet to be set.
If Judge Andre van Niekerk sides with Amcu, some of the country’s biggest gold producers will be crippled, including Harmony Gold’s Kusasalethu, Sibanye Gold’s Driefontein and AngloGold’s Mponeng.
Lastly, we need to factor in two things: the potential for hefty downgrades by the rating agencies and the weak rand. The downgrades might leave our bond and stock markets unable to afford any significant capital outflow, given their current battles to do so.
The weak rand implies more imported inflation because South Africa is a net importer.
Considering all of the above, and the slew of weak economic indicators released last week, it would appear that inflation is almost certain to increase.
This, in turn, might mean the Reserve Bank will increase interest rates as they seek to bring it back within the 3% TO 6% band – further constraining the economy. (I am not even going to bother exploring the notion that this erodes the real value of Amcu’s wage demands.)
Further, stagflation was mentioned by the Reserve Bank governor Gill Marcus in April last year as a concern and so I dare say she is more troubled by it now. Stagflation is difficult for policy makers to deal with, because attempts to reduce inflation can worsen unemployment.
The message then is that something needs to be done.
The Amcu strike in the platinum sector needs to be resolved and Judge Van Niekerk needs to side with business, for if a protected strike starts in the gold sector as well, it too might last months.
- Fin24
Now I do not wish to suggest that we are experiencing stagflation, but it does seem a possibility.
Firstly, unemployment is high, that much we all know, and inflation is above the 3% to 6% target band. So if inflation does continue to face upward pressure – which I expect it will – then there is certainly the chance of us ‘stagflating’.
Secondly, I expect upward pressure on inflation because of the Association of Mineworkers and Construction Union (Amcu). Amcu is leading the strike in the platinum sector and is at present trying to get one going in the gold sector as well.
Although the strike in the gold sector is currently prevented till the final ruling is made, a date for the verdict has yet to be set.
If Judge Andre van Niekerk sides with Amcu, some of the country’s biggest gold producers will be crippled, including Harmony Gold’s Kusasalethu, Sibanye Gold’s Driefontein and AngloGold’s Mponeng.
Lastly, we need to factor in two things: the potential for hefty downgrades by the rating agencies and the weak rand. The downgrades might leave our bond and stock markets unable to afford any significant capital outflow, given their current battles to do so.
The weak rand implies more imported inflation because South Africa is a net importer.
Considering all of the above, and the slew of weak economic indicators released last week, it would appear that inflation is almost certain to increase.
This, in turn, might mean the Reserve Bank will increase interest rates as they seek to bring it back within the 3% TO 6% band – further constraining the economy. (I am not even going to bother exploring the notion that this erodes the real value of Amcu’s wage demands.)
Further, stagflation was mentioned by the Reserve Bank governor Gill Marcus in April last year as a concern and so I dare say she is more troubled by it now. Stagflation is difficult for policy makers to deal with, because attempts to reduce inflation can worsen unemployment.
The message then is that something needs to be done.
The Amcu strike in the platinum sector needs to be resolved and Judge Van Niekerk needs to side with business, for if a protected strike starts in the gold sector as well, it too might last months.
- Fin24
