Stagflation fears for policy makers
Inflation, employment data due this week
July 27, 2009
By Ethel Hazelhurst
Figures on inflation and the job market, due this week, are expected to show whether South Africa is facing stagflation, the combination of stagnant economic growth and high inflation, which poses a dilemma for policy makers.
Inappropriate measures to stimulate growth can drive inflation higher, while attempts to curb inflation with high interest rates can stifle economic growth and job creation.
The issue is the focus of debate as critics of monetary policy call on the Reserve Bank to cut its official repo rate further, from its present 7.5 percent, following 4.5 percentage points of cuts since December.
The bank's monetary policy committee (MPC) will meet next month to make a call on the correct level for rates in the current economic climate.
Statistics SA will tomorrow release the second-quarter results of its quarterly labour force survey. The first-quarter survey showed a loss of 208 000 jobs, which raised the unemployment rate from 21.9 percent in the fourth quarter of last year to 23.5 percent.
This put the government's goal of cutting unemployment to 14 percent by 2014, which requires the creation of 500 000 jobs a year, in jeopardy.
Given recent data on manufacturing, mining and retail, the latest figures are expected to show more jobs were lost.
Mike Schussler, a director at Economists.co.za, predicted a 1 percent fall in the number of jobs. And he said the reality might be worse because many staff were working short hours.
While this calls for more measures to stimulate the economy, the Reserve Bank's scope to cut interest rates further is limited by inflation, which was as high as 8 percent year on year in May. Unless last month's figure, to be published on Wednesday, drops towards the central bank's 3 percent to 6 percent target range, there may be no further rate cuts.
One of the problems is that food at the consumer level has run way above producer food inflation. But Brait economist Colen Garrow said: "The Competition Commission is putting food retailers under scrutiny so the chances are good that certain retailers may opt to delay hiking prices."
Citi economist Jean Francois Mercier is relatively optimistic about the June figure. "We think food price inflation dropped to 10.5 percent year on year in June from 12.3 percent in May and a high of 15.8 percent in January."
Producer inflation is negative, with prices falling 3 percent year on year in May. Mercier predicted that data due on Thursday from Stats SA would show a further fall. Once again food prices are a major influence on the overall figures.
Dawie Maree, an economist at Agri SA, said yesterday that maize prices had continued to fall, while prices for meat and milk were stable.
Other data influencing the rate decision are also due.
Figures on private sector credit extension will be published by the Reserve Bank on Wednesday. Standard Bank predicted the June figure would show a drop in year-on-year growth to 5.6 percent from 5.7 percent in May, which makes room for a rate cut.
Trade data is due on Friday. In May South Africa had a trade surplus of more than R2 billion - the first surfeit since December 2006. But the monthly figure is volatile and difficult to predict.
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