Rand a positive, but strikes rankle
August 3, 2009
PPI inflation declined yet again in June, at -4.1% y/y from -3% in June.
The deflation in producer prices is an indication of the depth of the recession, with economic activity having severely slowed.
PPI inflation on exported goods declined by a massive -9.7% following a -6% and -2.7% y/y decline in May and April respectively, while PPI inflation on imported goods declined by -17.9% y/y in June.
The severe decline shows the extent of the slowdown in domestic production, which worsens the picture for Q2 GDP growth.
PPI inflation on agricultural food declined to -6.5% in June.
Manufacturing food inflation remained positive at 3.7% y/y, but declined by -0.8 percentage points from May to June. CPI food inflation has moderated significantly from 16.4% in January to 10.2% in June.
Therefore, although the link between overall PPI and CPI inflation has weakened (ever since the methodology for measuring PPI was revised last year to incorporate a far greater commodity-related component), it is still relevant.
The fall in agricultural and manufactured food is likely to lead to further reductions in food prices at consumer level in the second half of 2009.
Q2's labour force survey saw employment decline across the board of sectors, an indication that production slowed significantly during the quarter. Therefore it is likely that a lower demand for commodities, due to production cutbacks, is the root of the current decline in producer prices.
Theoretically, the declines in CPI and PPI over the last few months would argue for further reductions in interest rates, which would be further strengthened by the decline in employment in Q2, as well as the consistent decline in money supply and credit extension growth.
It is conceivable that the monetary authorities will want to wait until the ultimate inflationary impact of the rebound in commodity prices recently and the high wage and electricity price increases introduced recently, becomes more apparent.
However, coming on the back of weak employment numbers, ongoing strength in the rand and extremely favourable CPI numbers published, the probability of an interest rate reduction at the next MPC meeting in a fortnight's time has risen to at least 50%, if not more.
M3 money supply growth declined for the eighth consecutive month in June, to 5.7% on a y/y basis during the month.
The continued decline in economic activity is likely to prolong the downward trend in money supply, with company profits having declined significantly since Q3 2008 and households having been under increased financial strain due to high interest rates and inflation, reducing the propensity to save.
PSCE has been following a similar downward growth path: PSCE growth declined to an 11 month low of 4.2% y/y in June, with credit extension excluding investments growth down to a lower 2.4% y/y from 4.2% in May.
It is surprising that credit extension growth should continue to decline more significantly than money supply growth, even with the reduction in interest rates. This further outlined the increased reluctance by credit institutions to provide credit finance in the current economic conditions.
As expected, household credit extension remained extremely subdued, with absolute declines in HP credit and leasing finance and barely any increase in mortgage finance. This is a function both of the still high level of household debt and a reluctance on the part of the banking system to lend out money to households.
With the decline in credit extension to households, coupled with lower interest rates than in 2008, growth in insolvencies is likely to continue to be negative and should assist in the revival of consumption expenditure.
In contrast to the decline in non-investment credit extension, credit extended for investment has been on the rise over the last six months, escalating from 17.2% in January to 57% in April, on a y/y basis.
This has subsequently moderated to 44.3% in May and then to 39.9% in June. Despite the declines in growth in the second quarter, the growth average has increased from 24.2% in Q1 2009 to 47.2% in Q2 2009.
This indicates increased levels of confidence with regards to long-term business conditions in the economy.
In the case of growth in money supply, this was depressed not only by the decline in private credit extension, but also by a bigger-than-expected fall in government borrowing. The latter is encouraging given the fears of excessive borrowing by the government in the face of larger-than-expected declines in tax revenues relative to budget.
There can be no doubt that falling growth in money supply is conducive towards lower inflation in the longer term. However, much of the inability of inflation to decline as much as anticipated in recent months is attributable to the lagged effects of the high growth in money supply a couple of years ago.
In other words, the declining growth in money supply currently is likely to work through towards reducing inflation only in a year or two's time. Nonetheless, the figures are supportive of serious thought being given to reducing interest rates again in the short to medium term. - I-Net Bridge
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