Interest rate cuts on the cards - economist

Johannesburg – A stronger rand, lower inflation and an improved economic growth outlook signal a rate cut by the second half of the year, according to an economist.

At a quarterly investment update held on Wednesday, senior economist at Old Mutual Investment Johann Els said the South African economy is in for a turnaround.

He also added that the recovery and fiscal consolidation would improve South Africa’s chances of avoiding a credit downgrade by Standard & Poor’s to below 50%.

“In the past Treasury would not follow through with the October budget; this year they did and it’s a positive. There is also a slightly better outlook that [Finance Minister] Pravin Gordhan will be with us for a longer time and there has been an improvement in state-owned enterprises in terms of governance,” said Els.

“S&P is looking for slow steady improvement, not necessarily big and sudden improvements.”

He added that local politics has the potential to wreak havoc, but that there is a better chance South Africa won’t be downgraded.

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Els said there was a more “optimistic outlook” for the South African economy this year, compared to last year when the economy was characterised by slow growth and low inflation.

Part of the recovery has to do with the improvement in the global outlook, explained Els. The combination of a stable and weaker US dollar and improved circumstances in the Chinese economy will bode well for emerging markets and South Africa, he added.

Economic growth

Contributors to the improved economic outlook for South Africa are better rainfall in maize growing areas, said Els. This means the yield of maize crops will be better than a year ago during the drought.

A slight recovery in agricultural production, although a small part of the economy, would see a significant boost to the economy, he explained.  

“A 10% recovery in real agricultural production, given the rest of economy does nothing, translates to a 0.5% growth in GDP,” he said.

Furthermore, improvements in leading indicators by the South African Reserve Bank and the Standard Bank Purchasing Manager’s Index signal “better conditions” ahead. However, Els highlighted that South Africa is suffering from a confidence crisis among consumers and business which is holding back better economic growth.

“Politics is a huge constraint … Political uncertainty impacts business and the decision to invest,” he said. So far private fixed investment dropped 9.5% from a peak of 10%.

“We need a confidence recovery to make for a better growth outlook.”

He added that a tighter fiscal policy would also impact growth in the first half of the year.

Inflation and the rand

Lower inflation is expected by the second half of the year, which would prompt rate cuts, said Els. However, consumers will still face a tough first half of the year, given tax increases.

Els said bread and cereal prices are due for a correction. A significant fall in food prices is also expected.

“We are confident in the inflation forecast and (it) could reach below 5% by June or July,” he said.

The rand will also strengthen as commodity prices rebound and peer currencies improve, and as the foreign trade deficit has narrowed, explained Els. The improvement of commodity prices however depends on whether the dollar will strengthen and the Chinese economy continue on a stable path.

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Els added the improved trade deficit, at R10.8bn, is a result of a better global economy.